Public Finance And Public Policy

Front 1

What are the assumptions of the Tiebout Model?

Back 1

1. Large number of individuals who divide themselves up across towns with various provision of public goods.
2. A given town (i) has a given number of residents (N) who all demand the same quantity of the pubic good (G)
3. There is a uniform tax of the quantity of the public good being provided, divided by the number of people living in the town (G/N)

Front 2

According the the Tiebout Model, where does inefficiency in public goods provision come from?

Back 2

1. Shopping: it induces efficiency
2. Competition: it induces the right prices and quantities
At the federal level, these are issues because individuals are not able/willing to move to other countries if they are unhappy with one of the quantities of public goods being provided. Therefore the federal government experiences little competition which leads to inefficient public goods provision.

Front 3

How does the Tiebout Model solve the preference revelation problem?

Back 3

-Mobility is the preference revelation device.
-People have no incentive to lie. They must act on their lie by moving somewhere else where they will experience unideal amounts of the public good. They will save 1/N in tax by moving, but also receive 1/N less of the public good.

Front 4

How does the Tiebout Model solve the preference aggregation problem?

Back 4

This is solved because everyone living an a given town requires the exact same amount of the public good, G. Preferences are already aggregated in these towns.

Front 5

What are the three main areas of problems in the Tiebout Model?

Back 5

1. Tiebout competition
2. Tiebout financing
3. Spillovers

Front 6

What are the problems associated with Tiebout competition? Perfect mobility.

Back 6

It assumes perfect mobility: individuals want to vote with their feet and are able to carry out that vote. In reality, when an individual is located somewhere with friends/family, it would take a lot more than dissatisfaction with the quantity of one public good being provided for them to move.

Front 7

What are the problems associated with Tiebout competition? Perfect information.

Back 7

It assumes perfect information on the benefits that individuals receive and the taxes that they pay. If a school were buying excessively expensive equipment which raised an individuals taxes, they would not know this unless they were somehow exposed.

Front 8

What are the problems associated with Tiebout competition? Choice.

Back 8

It requires enough choice of towns so that individuals can find the right levels of public goods. In many cases, moving to another town is not close enough to keep job, etc.

Front 9

What are the problems associated with Tiebout competition? Scale/size.

Back 9

Requires sufficient scale or size for the provision of some public goods. Schools need more than just a few students. Efficiency of a public good is much higher if it is used by many rather than few. Fixed costs are dispersed among many. There would likely be groups who were not large enough to succeed.

Front 10

What are the problems associated with Tiebout financing?

Back 10

Requires equal financing of the public good among all residents, independent of a person's income, consumption of goods and services, or wealth. High inequitable, rich and poor pay the same, people will riot. Property tax is more generally used b/c its in proportion to the value of the homes. Problem here: poor chase the rich: poor want to live with people who are richer so they can free ride.

Front 11

What are the problems associated with spillovers in the Tiebout model?

Back 11

Assumes there are no externalities/spillovers. Assumes effects are only in a give town, because there is spillover there is a case for provision of public goods at a higher level of government (state?). People from other towns will come over to enjoy your park. Negative externalities, if police isn't financed well crime will spill over to next town making it more expensive if they value less crime etc.

Front 12

How long has social security been effective?

Back 12

It has been successful in over 20 nations for over 100 years.

Front 13

How has relative income inequality progressed over time in the US?

Back 13

The share of income that the poorest 1/5th receives has fallen over time, while the share of income that the richest 1/5th of the population receives has increased over time.

Front 14

How does relative income inequality in the US compare to other countries?

Back 14

It is much higher

Front 15

What are the characteristics of welfare programs in the US?

Back 15

Categorial v. Means-tested welfare, and Cash welfare v. In-kind welfare.

Front 16

What is Categorical welfare?

Back 16

Welfare programs that are restricted by some demographic characteristic such as being a single mother, or having a disability.

Front 17

What is Means-tested welfare?

Back 17

Programs that are tied to income and asset levels. Example: benefits are only given to those with incomes below the poverty line.

Front 18

What type of welfare programs are most common in the US?

Back 18

Most are both categorical AND means-tested. Ex: Cash welfare for low-income single mothers.

Front 19

What are Cash welfare programs?

Back 19

Programs that provide cash benefits to recipients.

Front 20

What are In-kind welfare programs?

Back 20

Programs that deliver goods, such as medical care or public housing, rather than cash.

Front 21

What is the benefit guarantee?

Back 21

The cash welfare benefit provided to individuals who have no other income, it varies across states and is too low to move a family out of poverty.

Front 22

What is the benefit reduction rate?

Back 22

The benefit that someone on welfare gets is reduced as income increases, this rate is the rate at which benefits are reduced per dollar of other income earned. Tends to be high (50-100%).

Front 23

How does TANF work?

Back 23

The federal government provides block grants to states that finance the program, they also impose a 5 year limit on any individual receiving it, and require the individual to work after 24 months at most of receiving benefits. Additionally, half of the state's TANF caseload must be working at any given point in time.

Front 24

What is the largest welfare program in the US?

Back 24

Medicaid, expendictures of $250 billion in 2003 (10x TANF)

Front 25

Authur Okun compared income redistribution to a "leaky bucket," what did he mean?

Back 25

We are carrying money from the rich to the poor, but some money leaks out along the way. The cost of "moral hazard". Social welfare function: less redistribution leads to more social efficiency.

Front 26

Where does the leakage from the "leaky bucket" described by Authur Okun come from?

Back 26

Administrative costs, taxation on higher income individuals will affect their labor supply/savings, and most importantly, by insuring against being poor, the programs create an incentive for individuals to become poor in order to qualify for the transfers.

Front 27

What is the equation used to calculate actual welfare benefits?

Back 27

B = G - T(earnings) Earnings - wh
B = actual benefits received
G = benefit guarantee level
T = benefit reduction rate
w = hourly wage
h = hours worked

Front 28

What happens when you set actual benefits equal to zero?

Back 28

It results in the "break-even formula" where the income level is reached where welfare eligibility ends

Front 29

What is the iron triangle?

Back 29

There is no way to change either the benefit reduction rate of the benefit guarantee to simultaneously encourage work, redistribute more income, and lower costs.

Front 30

What are the goals of reforming a simple cash welfare program?

Back 30

1. To encourage work
2. To redistribute more income
3. To lower costs

Front 31

What is the Moral Hazard?

Back 31

That people will try to do things in order to get on welfare. If they are earning too much they will quit their jobs so they can earn a little less but get a lot more leisure time, etc. They will spend the governments money in unproductive ways. eg drinking, etc.

Front 32

What were the changes made by the PRWORA (Personal Responsibility and Work Opportunity Reconciliation Act) of 1996?

Back 32

1. Cash welfare was changed from an entitlement (gov paid at least 1/2 of states expenditures on benefits), to a block grant (gov sent each state a check with fixed amount)
2. States could experiment with different levels of benefit reduction rates, or allow women to keep more child support, etc.
3. Time limits were imposed on welfare recipients (TANF 5 years), did not exist before PRWORA
4. Work requirements were imposed on wefare recipients (less strict before PRWORA)
5. Efforts to limit unwed motherhood: teenagers had to live with parents and attend school; 25% reduction in benefits for mothers who dont identify father of their children; states can impose family caps (benefits stop increasing at a certain # of children).

Front 33

Effects of the 1996 PRWORA welfare reform?

Back 33

1. Large financial windfall for states because block grants were tied to level of welfare expenditures in 1994 which dramatically exceeds current levels in every state.
2. Large increases in labor supply of single mothers.
3. No noticeable effect on fertility rates, caps didn't seem to affect the amount of children mothers had.

Front 34

What factors are important to knowing if PRWORA was effective?

Back 34

1. Incomes didn't fall on average but they did for women at the very bottom of the income distribution.
2. Incomes didn't rise very much or fall, and leisure time decreased.
3. Passed during a large economic expansion, can it hold up in a recession?
4. Long-run effects are on the children who grew up being raised by people who were not their mothers, what effect will this have on society?

Front 35

What did welfare reform in 1996 appear to do?

Back 35

Reduced welfare roles without significantly reducing the incomes of welfare recipients.

Front 36

What are the two components that Social Security depend on?

Back 36

The growth of the population and the wage rage.

Front 37

What are the fundamental reforms suggested for social security in the future?

Back 37

1. Investing the trust fund in stocks: but stocks are unreliable and benefits will fluctuate wildly with the stock market and different generations will receive different benefits.
2. Privatization: individuals invest their payroll taxes in various assets through individual controlled accounts: higher costs and lower paybacks, assumes individuals are competent, etc.

Front 38

What are the two key problems of social insurance?

Back 38

1. Adverse Selection
2. Moral Hazard

Front 39

What is Adverse selection?

Back 39

The fact that the insured individual knows more about their own risk level than does the insurer. People who want insurance are the ones who are already sick, and insurance companies only want to insure the healthy people.

Front 40

What is Moral Hazard?

Back 40

when you insure individuals against adverse events, you can encourage adverse behavior. The idea that when someone gets insurance they care less because they know they are insured, life insurance? do they really not care if they die sooner? doubtful!

Front 41

What does it mean when someone wants to "smooth their consumption"?

Back 41

If one gets the choice between two years of average consumption or one year of excessive consumption and one year of starvation, individuals prefer the former. This is because the year of excessive consumption does not raise their utility as much as the year of starvation lowers it.

Front 42

In what cases will adverse selection not lead to market failure?

Back 42

When most individuals are risk averse, such that they will buy an unfair policy.

Front 43

In what ways could the government help adverse selection?

Back 43

1. It could make everyone pay a fixed amount for a policy from a private company.
2. It could offer the insurance directly
Both would lead to low risks subsidizing the high risk individuals

Front 44

What are reasons for government intervention in insurance markets besides adverse selection?

Back 44

1. Externalities
2. Administrative costs
3. Redistribution
4. Paternalism

Front 45

Reasons for government in insurance markets. Externalities.

Back 45

Negative externalities arise from underinsurance. Health insurance, if you are ill and dont have insurance to get better you will make others ill. If you dont have autoinsurance and crash into someone etc.

Front 46

Reasons for government in insurance markets. Administrative Costs.

Back 46

Economies of scale in administrative costs. Suggests one large firm should supply, because costs of smaller firms would drive up the costs of insurance and make it less actuarially fair.

Front 47

Reasons for government in insurance markets. Redistribution.

Back 47

With full information, the outcome is for the careless consumer to pay ten times as much as the careful one, the government might want to intervene and subsidize the high premiums paid by some by the low risk individuals. Technologies however are advancing and genetic testing carries the implication that the genetically unlucky will have to pay much more than those with good genes.

Front 48

Reasons for government in social insurance. Paternalism.

Back 48

Individuals may not adequately insure themselves unless the government makes them.

Front 49

What are the factors that determine moral hazard?

Back 49

1. How easy it is to detect whether the adverse event happened
2. How easy it is to change one's behavior to establish the adverse event

Front 50

What are the four components to optimal social insurance?

Back 50

1. Individuals value insurance and want to smooth consumption.
2. Insurance markets may fail to emerge due to adverse selection.
3. Private consumption smoothing mechanisms may crowd out out government spending (self insurance in the case of unemployment).
4. Expanding insurance encourages moral hazard.

Front 51

What are the positive externalities associated with government involvement in education?

Back 51

1. Productivity
2. Citizenship
3. Credit market failures
4. Failure to maximize family utility

Front 52

Government in education. Productivity.

Back 52

Social benefits from increased productivity of an educated individual include spillovers to other workers, one persons productivity could raise that of their coworkers, and if higher productivity is reflected in higher pay the government receives more in taxes.

Front 53

Government in education. Citizenship.

Back 53

Education may make people more responsible citizens who commit less crime (most makes a difference for elementary level education)

Front 54

Government in education. Credit market failures.

Back 54

A family could borrow to finance childs education but the creditor cant observe if the child is a good risk to pay back the loan or not and will therefore likely offer too little credit in a situation such as this one.

Front 55

Government in education. Family utility.

Back 55

Parents may not choose appropriate levels of education for their children, without public provision, some smart children would be penalized for having selfish parents.

Front 56

What are the arguments in favor of education vouchers?

Back 56

1. Consumer sovereignty
2. Competition

Front 57

Explain how vouchers affect consumer sovereignty

Back 57

They enhance consumer sovereignty by allowing individuals to match their education choices with their tastes.

Front 58

Explain how vouchers affect competition.

Back 58

Competitive pressures allow the education market to work more efficiently by putting discipline on public schools by making private schools a more realistic option.

Front 59

What are the problems associated with educational vouchers?

Back 59

1. Excessive specialization
2. Stratification/ Segregation
3. Poorly targeted
4. Market may not be competitive
5. Don't account well for high cost students

Front 60

Problems with edu vouchers. Specialization.

Back 60

"football schools" or "art schools" could emerge to attract a particular market and could give less attention to basic elements of education. Accreditation and testing could help solve this.

Front 61

Problems with edu vouchers. Segregation..

Back 61

Could reintroduce segregation, children of disinterested/uninformed parents end up in low quality public schools and children of motivated parents end up in higher quality private schools

Front 62

Problems with edu vouchers. Poorly targeted.

Back 62

If they are targeted to families like Y edu spending goes up by more but this is difficult to do in practice.

Front 63

Problems with edu vouchers. Competition.

Back 63

The edu market may be described as a natural monopoly, there are fixed costs and economies of scale so it is not efficient to have many small schools competing with each other

Front 64

Problems with edu vouchers. Costly students.

Back 64

Some students are more costly to educate: special ed, schools have an incentive to avoid these students