Public Policy

Question 1

when should the government intervene

Answer 1

when it can increase social welfare

Question 2

social welfare

Answer 2

level of well being in society - determined by how much gets produced and how its distributed

Question 3

when will government intervention increase social welfare

Answer 3

when it can increase social efficiency or when it can achieve a more preferred distribution of resources

Question 4

social efficiency

Answer 4

net gains to society from all activity in a market - sum of consumer and producer surplus

Question 5

consumer surplus

Answer 5

benefit that consumers derive form consuming a good

Question 6

producer surplus

Answer 6

benefit that producers derive from selling a good

Question 7

market demand curve

Answer 7

sum of buyers demands

Question 8

market supply curve

Answer 8

sum of sellers supply

Question 9

market equilibrium

Answer 9

where demand and supply intersect

Question 10

social efficiency is maximised at

Answer 10

the competitive equilibirum

Question 11

market failures examples

Answer 11

imperfect competitive, imperfect or asymmetric information, individual failures, externalities

Question 12

2nd fundamental theorem of welfare economics

Answer 12

society can attain any efficient outcome by suitable redistributing resources among individuals and then allowing them to freely trade

Question 13

equity-efficiency trade-off

Answer 13

we have to trade of social efficiency (total size of economic pie) with increased equity (how the pie is distributed among individuals)

Question 14

how does the government intervene

Answer 14

provision of cash benefits, direct spending or financing of public provision, taxes and subsidies, restrict or mandate private sale or purchase

Question 15

direct effects of intervention

Answer 15

the effects in individuals did not change their behaviour in response to interventions

Question 16

indirect effects of intervention

Answer 16

the effects that arise because individuals change their behaviour in response to interventions

Question 17

positive statement

Answer 17

object statements that can be tested, amended or rejected based on evidence

Question 18

normative statements

Answer 18

subjective statements that involve a value judgement or opinion

Question 19

what is insurance

Answer 19

the future is uncertain. insurance allows you to smooth consumption, so you get the same amount whether you end up in a good or bad state of the world

Question 20

expected utility def

Answer 20

weighted sum of utilities across state of the world - weights are probability of each state occuring

Question 21

expected utility equation words

Answer 21

(prob adverse event doesnt occur)x(utility from consumption when adverse event doesnt occur) + (prob adverse event occurs)x(utility from consumption when adverse event occurs)

Question 22

how can you smooth consumption

Answer 22

by saving, borrowing or purchasing insurance

Question 23

expected utility equation algebra

Answer 23

EU = (1-q)U(w-p) + (q)U(w-p-d+b) where: q is probability, w is income, p is insurance premium, d is cost (e.g. medical cost when sick), b is pay-out

Question 24

if insurance market is competitive and works well, firm charges and insurance premium of

Answer 24

p = q * b, where q is probability, b is payout

Question 25

heterogeneity in risks across individuals

Answer 25

people dont all have the same probability of adverse events affecting them

Question 26

asymmetric information

Answer 26

occurs when individuals know their own probability but insurance companies don’t

Question 27

situation where the market will unravel due to asymmetric information

Answer 27

insurance companies can’t see who’s sickly and who’s healthy, everyone buys the healthy insurance as it’s cheaper, insurance company makes bigger payouts than they received and so make a loss

Question 28

situation of adverse selection

Answer 28

insurance companies offer fair price or average of healthy and sickly price, low risk people wont buy insurance but high risk people will, insurers make losses and so raise prices, this drives more low risk people out the market, so insurers make losses and raise prices. Continues on until market unravels, and no insurance is offered

Question 29

how can the government address adverse selection and improve market efficiency

Answer 29

directly provide the insurance (NHS), mandate that everyone is required to purchase insurance (car insurance)