The costs and benefits of social insurance to firms. The “benefits” of partial experience rating. The Effects of Partial Experience Rating in UI on Layoffs.

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The costs and benefits of social insurance to firms. The “benefits” of partial experience rating. The Effects of Partial Experience Rating in UI on Layoffs.

partially experience-rated The tax that finances the UI program rises as firms have more

layoffs, but not on a one-for-one basis. The UI payroll tax is partially experience-rated; that is, it rises as firms have more layoffs, but not on a one -for-one basis. Thus, firms with twice as

many layoffs do not typically pay twice as much in payroll taxes. An important feature of UI is that not all those out of work qualify for benefits. To be eligible, workers must meet three criteria. Having afully experience -rated system would “hit firms while they are down”: just

when firms have laid off the most workers (presumably because the firm is not

doing well), their taxes would increase the most.At the same time, by having partial experience rating, UI programs systematically subsidize high -layoff firms. These firms may be particularly inefficientfirms that, in a capitalist economy, should go out of business, leaving the field

to their more efficient rivals.












Probability of getting paid $50,000 = 100%-5% = 95%
Probability of getting paid $20,000 = 5%

Your expected salary is the weighted average of the two:

(50,000 x 0.95) + (20,000 x .05) = 47,500 + 1000 = $48,500 expected salary


b) Therefore the fair price for insurance is $1,500. This way you pay the 1,500 and if your salary drops you get 30,000, but youve paid 1,500 so your net salary is 48,500. Wherease if you didnt get the insurance your expected salary is 48,500..





Social Insurance vs. self -insurance: How much consumption smoothing? Consumption-smoothing benefits of unemployment insurance?

The translation of consumption from periods when consumption is high, and thus has low marginal utility, to periods when consumption is low, and thus has high marginal utility. States of the world: The set of outcomes that are possible in an uncertain future.

a. Social Insurance vs. Self-Insurance: How Much Consumption Smoothing?self-insurance: The private means of smoothing consumption over adverse events, such as through one’s own savings, labor supply of family members, or borrowing from friends.

b. Unemployment insurance example: Individuals do not generally have a private form of unemployment insurance, but they do have other potential means to smooth their consumption across unemployment spells: They can draw on their own saving; They can borrow, either in collateralized forms or in uncollateralized forms; Other family members can increase their labor earnings; They can receive transfers from their extended family, friends, or local organizations.

èThe availability of self-insurance determines the value of social insurance to individuals suffering adverse events.

c. The importance of social insurance for consumption smoothing will depend on two factors: Predictability of the event and Cost of the event.

Why Do Individuals Value Insurance? Expected utility model. The role of risk aversion.

Insurance is valuable to individuals because of the principle of diminishing marginal utility. We typically assume that the marginal utility derived from consumption falls as the level of consumption rises: the first pizza means a lot more to you than the fifth. This intuitive assumption means that, if given the choice between (a) two years of average consumption and (b) one year of excessive consumption and one year of starvation, individuals would prefer the former. Individuals prefer two years of average consumption because the excessive consumption doesn’t raise their utility as much as the starvation lowers it.

Expected utility model:The weighted sum of utilities across states of the world, where the weights are the probabilities of each state occurring.

The role of risk aversion:One important difference across individuals is the extent to which they are willing to bear risk, or their level of risk aversion.Individuals who are very risk averse are those with a very rapidly diminishing marginal utility of consumption; they are very afraid of consumption falling, and are happy to sacrifice some consumption in the good state to insure themselves from large reductions in consumption in the bad state.5 Individuals who are less risk averse are those with slowly diminishing marginal utility of consumption; they aren’t willing to sacrifice very much in the good state to insure themselves against the bad state. Individuals with any degree of risk aversion will want to buy insurance when it is priced actuarially fairly; so long as marginal utility is diminishing, consumption smoothing is valued. When insurance premiums are not actuarially fair, as in some cases we describe next, those who are very risk averse may be willing to buy insurance even if those who are not very risk averse are unwilling to buy, since the former group is willing to sacrifice more in the good state to insure the bad state.

Arguments for government funding of medical care rest on equity concerns. Explain how medical care can be a public good. If medical care is a public good, explain how this would lead to a market failure in that individuals would receive less medical care than is efficient.

Government plays an important role in the various medical markets and either directly or indirectly influences the health of the population in a number of ways. For example, regulatory and taxing policies affect the production or consumption of certain products (such as prescription drugs, narcotics, alcohol, and tobacco) and thereby beneficially or adversely affect the population's health.
The public policy and current political action around changing the system overlooks two important technical fallacies:(1) That health care is most efficiently distributed by a free market mechanism; and,
(2) That medical services are an ordinary commodity.
The commercial market model is a failing economic and public policy ideology used to rationalize and justify corporate control of the health care system to profit from the enterprise. Medical services are not an ordinary commodity but more like a “public good” which should be financed using a regulated public utility model.
A “public good” is a product or service which benefits everyone in the community. Public goods are characterized by: (1) value that has benefit to the community as a whole beyond any purchase price paid, (2) often requiring large initial investment costs that are generally too expensive for any individual or private corporation to afford and earn a reasonable return, (3) requiring a higher level of administration than any individual or company can arrange and (4) having value that accrues over time and is difficult to price properly. Public goods have “externalities,” that is, value that accrues to people who benefit by other’s consumption of them without paying for it themselves.
There are two separate reasons to intervene, market failure and equity. Taking market failure first, there are a variety of failures in health care and insurance markets such as asymmetric information, market power, and principal agent problems. These can be solved by the private sector in some cases, but in others government intervention is required. But even if the private sector or the government can solve the market failure problems adequately, there's no guarantee that the resulting distribution of health care services will be equitable. We don't expect the private sector to, for example, make sure that everyone can live on the coast and have an ocean view if they so desire, we use market prices to ration those goods, but we may want to make sure that everyone can get health care when they have serious illnesses. So equity considerations may prompt the government to intervene and bring about a different distribution of health care services than would occur with an efficient market. Both reasons, equity and efficiency, can justify government intervention into health care markets. I think equity is of paramount importance when it comes to health care, so for me that is enough to justify government intervention, and the existence of market failure simply adds to the case that government intervention is needed.












3.2. a)The probability that your income next year will be $50,000 is .95; the probability that

your income next year will be $20,000 is .05. Summing the expected values of the outcomes

yields .95($50,000) + .05($20,000) = $47,500 + $1,000 = $48,500. This is your expected

income next year.

b)An actuarially fair premium would be one that exactly offset the expected value of the

loss. In this case, the expected loss is $50,000 – $48,500 = $1,500, so an actuarially fair

premium would be $1,500.

Another (equivalent) way to determine this premium is to calculate the expected value

of the claims the insurance company would pay; here it is the probability of the loss occurring

times the dollar value of the loss, or .05 ($50,000 – $20,000) = .05($30,000) =


A third (equivalent) way to determine the premium is to compute the expected profits

to the insurance provider for any given premium P. Since the premium is surely paid and

the insurance company pays you $30,000 with a probability of 0.05, the expected profits

are given by P – .05($30,000). Actuarially fair premiums are those that lead to zero expected

profits; setting expected profits equal to zero and solving gives P = 0.05($30,000)

= $1,500 again.


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