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.

Medical services are 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.

Types of taxation. Taxes on earnings. Taxes on individual income. Taxes on corporate income.

The governments of the United States and other nations raise revenues through a wide variety of mechanisms.

Five most common types of taxes:

- payroll tax a tax levied on income earned on one’s job.

- individual income tax a tax paid on individual income accrued during the year.

- corporate income tax Tax levied on the earnings of corporations.

wealth taxes Taxes paid on the value of the assets, such as real estate or stocks, held by a person or family.

property taxes a form of wealth tax based on the value of real estate, including the value of the land and any structures built on the land.

estate taxes a form of wealth tax based on the value of the estate left behind when one dies.

consumption tax a tax paid on individual or household con- sumption of goods (and some- times services).

sales taxes Taxes paid by consumers to vendors at the point of sale.

excise tax a tax paid on the sales of particular goods, such as cigarettes or gasoline.

Taxes on Earnings

The first type of taxation is the payroll tax, a tax levied on the earnings

of workers. Payroll taxes are the primary means of financing social insurance programs, such as those discussed in the preceding chapters (Social Security, unemployment insurance, Medicare, and so on).

Taxes on Individual Income

The second type of taxation is the individual income tax, a tax paid by

individuals on income accrued during the year. Income for income tax purposes

includes labor earnings, but the tax is distinguished from the payroll tax

by (a) applying to a broader set of income sources (such as interest earnings

from household savings as well), and (b) applying in many cases to the entire

income of a family, not just to the income of one individual worker. A form of

income taxation that is of particular interest is the taxation of capital gains,

the earnings from selling capital assets, such as stocks, paintings, and houses.

Taxes on Corporate Income

In addition to taxing individual income, many countries also separately tax

the earnings of corporations through the corporate income tax. The purpose

of the separate taxation of corporations, above and beyond taxes on

individuals, is to tax earnings of owners of capital that otherwise might escape

taxation by the individual-based income tax system.

How Are Social Security Benefits Paid Out?

Social Security A federal program that taxes workers to provide income support to the elderly.

Almost all workers in the United States pay the Federal Insurance Contributions Act (FICA) tax on their earnings. A person must have worked and paid this payroll tax for 40 quarters (10 years) over their lifetime, and must be age 62 or older.

Annuity payment A payment that lasts until the recipient’s death.

The amount of this annuity payment is a function of the recipient’s average earnings over the person’s 35 highest earning years where each month’s earnings are expressed in today’s dollars.This 35-year average of real monthly earnings is called the Average Indexed Monthly Earnings, or AIME.

Individuals can receive their PIA starting at age 66 and 4 months, which is the Full Benefits Age (FBA). As a result of 1983 legislation (discussed in more detail later in this chapter), the FBA is currently slated to rise to age 67 for those born in 1960 or later.12 It is possible to receive benefits as early as age 62, which is the Early Entitlement Age (EEA). For each year of benefits claimed before age 65, however, there is an actuarial reduction in benefits of 6.67% per year (for the 3 years before the FBA) or 5% per year (for earlier months). Individuals who claim their benefits at age 62 today receive about 27% less in benefits than those who claim benefits at age 65. This is called an “actuarial” reduction because it is designed to compensate for the fact that individuals who take benefits early receive them for more years.

 

Тесты

1e 2b 3a 4a 5b 6a 7b 8e 9e 10e

 

2. Explain the Crowd -Out Problem in Education. How would this "solve" with the Educational Vouchers? How vouchers will lead to excessive school specialization or to Segregation?

Crowd - out means that as the government provides more of a public good, the private sector will provide less. Crowd-out is a classic example of the unintended consequences of government action The government intended to do the right thing by increasing fireworks to the social optimum. But, in fact, it ended up having no effect because its actions were totally offset by changes in individual actions. Full crowd-out is rare. Partial crowd-out is much more common and can occur in two different cases: when noncontributors to the public good are taxed to finance provision of the good, and when individuals derive utility from their own contribution as well as from the total amount of public good. One solution to the crowd-out problem is the use of educational vouchers. Educational vouchers – is a fixed amount of money given by the government to families with school-age children, who can spend it at any type of school, public or private. The Voucher has the same effect as a conditional lump-sum grant to local governments: it raises incomes but forces the families to spend a minimum amount on education. Vouchers might solve this crowd-out problem by allowing people to choose the optimal level of education for themselves, as well as interjecting competition into the education market.

Many of the arguments in favor of public financing of education relate to the externalities that come from having a common educational program, particularly at the elementary school level. The first argument made here for vouchers, that schools will tailor themselves to meet individual tastes, threatens to undercut the benefits of a common program. So, Vouchers May Lead to Excessive School Specialization. Critics envision a world where children of motivated parents move to higher-quality private schools, while children of disinterested or uninformed parents end up in low-quality public schools. If the children of interested and motivated parents differ along the lines of race, income, or child ability from those of uninterested and unmotivated parents, segregation could worsen. Vouchers also might increase segregation by student skill level or motivation. As the motivated and high-skilled students flee poor-quality public schools for higher-quality private schools, the students left behind will be in groups that are of lower motivation and skill.

 

1. Suppose the federal government is considering raising the minimum wage to $10 per hour. An economist testifies to Congress that this plan is inefficient and causes deadweight loss.

a) Show graphically the deadweight loss caused by the minimum wage law.

b) Suppose that you are a member of Congress and you believe in the utilitarian social welfare function. How would you determine whether to vote for or against the policy?

c) Explain why this policy choice demonstrates a trade-off between equity and efficiency.

d) Explain the Earned Income Tax Credit. Explain why the EITC may provide equity with small losses in efficiency.

2 a) (график справа)

b)social welfare function (SWF) A function that combines the utility functions of all individuals into an overall social utility function.

With a utilitarian social welfare function, society’s goal is to maximize the sum of individual utilities: SWF= U1+ U2+...+Un

The utilities of all individuals are given equal weight, and summed to get total social welfare. This formulation implies that we should transfer from person 1 to person 2 as long as the utility gain to person 1 is greater than the utility loss to person 2. In other words, this implies that society is indifferent between one util (a unit of well-being) for a poor person and one for a rich person.

 

c) 'Equity-Efficiency Tradeoff'

An economic situation in which there is a perceived tradeoff between the equity and efficiency of a given economy. This tradeoff is commonly viewed within the context of the production possibility frontier, where any additional gains in production efficiency must be offset by a reduction in the economy's equity.

d) The Earned Income Tax Credit, EITC or EIC, is a benefit for working people with low to moderate income. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file. EITC reduces the amount of tax you owe and may give you a refund.

 

 

VARIANT 20

Most 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.
Medical services are 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.

2. Explain the Crowd -Out Problem in Education. How would this "solve" with the Educational Vouchers? How vouchers will lead to excessive school specialization or to Segregation?

Crowd - out means that as the government provides more of a public good, the private sector will provide less. Crowd-out is a classic example of the unintended consequences of government action The government intended to do the right thing by increasing fireworks to the social optimum. But, in fact, it ended up having no effect because its actions were totally offset by changes in individual actions. Full crowd-out is rare. Partial crowd-out is much more common and can occur in two different cases: when noncontributors to the public good are taxed to finance provision of the good, and when individuals derive utility from their own contribution as well as from the total amount of public good. One solution to the crowd-out problem is the use of educational vouchers. Educational vouchers – is a fixed amount of money given by the government to families with school-age children, who can spend it at any type of school, public or private. The Voucher has the same effect as a conditional lump-sum grant to local governments: it raises incomes but forces the families to spend a minimum amount on education. Vouchers might solve this crowd-out problem by allowing people to choose the optimal level of education for themselves, as well as interjecting competition into the education market.

Many of the arguments in favor of public financing of education relate to the externalities that come from having a common educational program, particularly at the elementary school level. The first argument made here for vouchers, that schools will tailor themselves to meet individual tastes, threatens to undercut the benefits of a common program. So, Vouchers May Lead to Excessive School Specialization. Critics envision a world where children of motivated parents move to higher-quality private schools, while children of disinterested or uninformed parents end up in low-quality public schools. If the children of interested and motivated parents differ along the lines of race, income, or child ability from those of uninterested and unmotivated parents, segregation could worsen. Vouchers also might increase segregation by student skill level or motivation. As the motivated and high-skilled students flee poor-quality public schools for higher-quality private schools, the students left behind will be in groups that are of lower motivation and skill.