Quizlet Spreadsheet - Public Economics Flashcards
1
Q
What are we achieving in this course
A
Making policy decisions based on people’s welfares
2
Q
By what mechanism do we convert decisions into utility?
A
Revealed preference
3
Q
Key parts of a utility functions
A
Non-satitation and diminishing marginal utility
4
Q
Marginal Rate of Substitution
A
The rate you are willing to trade one good for another
5
Q
What is the optimum
A
MRS = Price Ratio
6
Q
Uncompensated demand
A
Demand based on both income and substitution effects
7
Q
Compensated demand
A
Demand based only on the substitution effect
8
Q
Slutsky Equation
A
Uncompensated demand = Compensated demand - Income elasticity weighted by the income share
9
Q
What is compensating variation?
A
The amount of money required to get back to the original level of utility
10
Q
What is equivalent variation?
A
The amount of money lost that is equivalent to the loss in utility
11
Q
What is consumer surplus
A
The area below the demand curve, to the left of the quantity, and above the price
12
Q
Argument for revealed preference
A
Non-paternalistic, we use their own choices
13
Q
What is MRT?
A
Marginal Rate of Transformation
14
Q
What is the Marginal Rate of Transformation
A
Slope of the PPF - cost in terms of good x to get one of good y (production)
15
Q
What is Market equilibrium
A
All our prices mean that demand = supply
16
Q
What is economic incidence?
A
How a change in price effects the distribution of welfare
17
Q
Second welfare theorem
A
We can get to any point on the contract curve by choosing a starting allocation
18
Q
What is Utilitarian welfare?
A
Profits + total consumer utility
19
Q
Issues with Coasian Bargaining
A
Costs of Bargaining and Costs of enforcement
20
Q
Coasian Bargaining - costs of bargaining
A
With pollution, millions of agents are involved. Can be countered by government representation
21
Q
Coasian Bargaining - Cost of Enforcement
A
Monitoring the causes of externalities is difficult
22
Q
What is Pigouvian taxation
A
Taxing at the exact level of the marginal externality
23
Q
What is the difficulty with choosing the level of Pigouvian Taxation?
A
Hard to know what the correct level is
24
Q
What is the combination of tax and permits?
A
Cap and Trade
25
What is an Internality
When some element of consumption outcomes is not considered when making a consumption decision
26
When Marginal Benefit of reduction is high, what should we do?
Set Quantities/cap and trade
27
When Marginal Benefit of reduction is low, what should we do?
Set prices/tax
28
What are the two conditions for public goods
Non-rivalrous and Non-excludable
29
What is non-rivalry?
One person’s consumption does not impact another person’s consumption
30
What is non-excludability
It is impossible to stop specific people consuming the product
31
What is the Samuelson Rule?
At the optimum for a public good, The summation of all Marginal Rate of Substitutions will equal the Marginal Rate of Transformation
32
What is Lindhal Pricing?
Tax imposed on everyone equal to their willingness to pay for public goods
33
Issue with Lindhal Pricing
Relies on accurate knowledge about people’s private values, which they have no incentive to share
34
What does the Gibbard-Satterthwaite rule say?
For any given voting rule, there are only two options, voters can vote strategically, or the vote is dictatorial
35
Ways to guarantee consistent preference aggregation (no.1)
Pareto Criterion - if all prefer A to B, then A is chosen
36
Ways to guarantee consistent preference aggregation (no.2)
Transitivity - When A>B and B>C, A>C
37
Ways to guarantee consistent preference aggregation (no.3)
Adding a non-preferred option should not affect the final decision
38
What is a Condorcet paradox
Cycles where each preference has a strategy with a majority over it
39
Arrow’s impossibility theorem
The only consistent aggregation of preferences is dictatorship
40
What conditions are required for majority voting to be consistent in aggregation
Single peaked, single dimension preference aggregation
41
Why does the median voter rule not produce societally efficient outcomes
Median voters often do not equal “mean” voter
42
In the tax and transfer model, who chooses the level of taxation
The median voter
43
In what way are people heterogeneous in the tax and transfer model?
Their time endowment
44
If wealth is positively skewed, what tax happens in the tax and transfer model?
High tax
45
Does the tax and transfer prediction does reflect the reality
No, as inequality falls, taxes generally rise.
46
What is the evaluation problem?
We cannot see the impact of the treatment on the untreated, and non-treatment on the treated
47
Empirical question
Observed difference = treatment effect plus selection bias
48
How do we get rid of selection bias
Identification strategies or RCTs
49
How to test the strength of your randomisation
Consistency of measurable covariates
50
Randomisation Bias
Those taking part may have different treatment effects than the population
51
Supply-side changes - empirical biases
Those supplying the treatment may differ between trial and population
52
Attrition Bias
Those who are in the treatment group may have different attrition rates than the control (can be solved through ITT IV analysis)
53
Hawthorne Effects
People know they are part of an experiment and act differently
54
Contamination Bias
Those who were not treated may get treated anyway
55
Substitution Bias
Those who were not treated may seek out alternatives
56
Externalities and general equilibrium biases
The existence of the treatment group may impact the control group
57
What is social insurance?
Government intervention to provide insurance against adverse events
58
What is the socially efficient level of insurance?
Full/perfect consumption smoothing
59
Why can’t we fully insure everyone? (non government)
Asymmetric information, and therefore adverse selection
60
Why does the government not have an issue with adverse selection?
Can use coercion to force everyone to insure
61
What is the main issue with the pensions market?
Individual failures to make good savings decisions
62
Benefits for government intervention in the pension market?
Avoid individual failures, fix market failures, redistribute and insure
63
What are the two types of pension schemes
Pay as you go and Fully Funded
64
How does a PAYG pension work
Workers pay a tax that funds the current pensioners, with the understanding that the next generation will fund them
65
How do fully funded pension schemes work?
Workers pay money into an account which accrues interest, and then uses that to pay for their retirement themselves
66
What defines the better choice of PAYG and Fully Funded?
Interest rate vs Growth of the economy
67
Evidence for paternalism in the pension market
Negative correlation between social security spending and elderly poverty rate
68
Explanation for the drop in expenditure at the point of retirement
Increase in home production - wellbeing does not fall
69
What sort of savers alter their behaviour when mandates come in
Passive
70
What is a bunching design?
Looking for whether people respond to policy by “bunching” around changes to how a policy applies to you
71
Bunching study - german retirement
People are more likely to retire at specific ages where policies apply differently to them - suggests response to policy.
72
Overall takeaway - german retirement study
People are slightly responsive to retirement policy, but very responsive to social messaging
73
Reasons for intervention in the healthcare market
Risk aversion (insurance), adverse selection, equity concerns, underconsumption of preventative healthcare, externalities of communicable diseases.
74
How does adverse selection play out in the healthcare insurance industry
Those who are higher risk are more likely to insure themselves, increasing the risk for the provider, forcing premiums higher ect.
75
Why are in-kind health benefits better than cash transfers sometimes?
Acts as “screening” - only those who need the healthcare will access it, allows you to target the support better
76
What are insurance deductibles?
Insurees pay up to a certain level of expense, then everything else is paid by the insurer
77
What are insurance copayments
Insurees pay a fixed amount for accessing resources
78
What is insurance co-insurance
Insuree pays a fixed share of each bill
79
Why do we not fully insure for healthcare
Moral Hazard
80
Because healthcare is subsidised, what happens to consumption?
Overconsumption
81
What is US Medicaid
State-level healthcare provision for poor single mothers, pregnant women, and children
82
What is US Medicare
Federal level medical support for the elderly and disabled
83
Why is healthcare expenditure rising in the developed world?
Higher quality of healthcare possible, also longer life expectancies ect.
84
What is the foundation of behavioural economics
Consistent decision making that does not align with classical consumer theory
85
What is loss aversion
People dislike losing more than they like gaining
86
One example of behavioural devices
Self control devices
87
Example of behavioural regulation
GDPR - cookies opt out/in
88
What are ordering effects
People make different decisions when ordering changes
89
Trend in overall taxation in the last 150 years
Overall increase, slight plateauing recent years
90
What is the elasticity of demand
Marginal change in demand to price, multiplied by price over demand
91
What is the elasticity of supply
Marginal change in supply to price, multiplied by price over supply
92
Tax incidence derivation - step one
Set up demand = supply, setup question “what is dp/dt”
93
Tax incidence derivation - step two
Differentiate D(q) = S(p) (q = p+t), witht he result D’q x dq = S’p x dp
94
Tax incidence derivation - step three
Use dq = dp + dt in the equation, giving D’q x (dp+dt) = D’p x dp
95
Tax incidence derivation - step four
Rearrange to get dp/dt = D’q/S’p-D’q
96
What does dp/dt represent?
The increase in price for the consumer based on an increase in tax
97
Tax incidence derivation - step five
Multiply our fraction through by q/Dq = p/Sp, which gives the whole expression in terms of elasticities
98
Tax incidence derivation - step six
Get the result dp/dt = el(D)/el(S)-el(D)
99
Key result of tax incidence
The incidence of tax is irrelevant to the material impact of tax
100
Reasons we care about inequality?
Fairness, political issues, impact on growth, social institutions and taxes
101
Why can we disregard net foreign assets (NFA)?
Negligible as a share of national income
102
What are the elements of capital income?
Corporate profits, rent, interest
103
What are the elements of labour income
Wages, supplements
104
What is the approximate labour/capital share of national income (1-a to a)?
70/30
105
Which is less evenly distributed - capital or labour?
Capital, mainly owned by a small portion of society
106
What is the wealth to income ratio (K/Y)?
Capital divided by total national income
107
What is the average return to capital (r)?
Yk/K
108
Accounting law for income share of capital
The income share of capital is equal to the average return on capital, multiplied by the wealth to income ratio - a = r x B
109
Is the rate of return on capital constant?
No, housing is lower than the stock market, but higher than government bonds etc.
110
Change in the wealth to income (K/Y) ratio - changes since 1970s
Has been rising
111
Change in capital share over time
Fell between 1800s to the 1920s, is now rising - was once considered stable
112
How to find capital and labour shares of income - cobb douglass
In perfect competition, wages and rents are equal to the marginal returns on the factors. You therefore take derivatives of the original function with respect to labour/capital, and then divide through by the original production function (which represents Y)
113
What is the key result about labour/capital share of income in the Cobb-Douglas case
Invariable on costs of labour and capital
114
What are the two theories for the increase in capital share?
New technology is causing people to substitute away from labour and towards the capital. Also, rising market power is leading to rising rents without increased capital
115
What has caused the large rise in income for the top 10%?
Mainly the growth of the top 1%
116
What is the race between education and technology?
As technology improves, the skills required to operate them increases, and therefore education needs to improve
117
Who is “winning” the race between education vs technology?
Technology - skills premiums are increasing
118
Other reasons that labour share of income is decreasing
International wage arbitrage, decline in US minimum wage in real terms, reduced union membership, changing tax rates
119
What are the five data sources that can be used to measure wealth inequality?
Household surveys, annual wealth data, inheritance tax data, income tax data, billionaire rankings
120
What happened to equality post world war 2
Massive increase
121
Why do we care about labour supply responses?
Economic growth, economic efficiency, government revenue, equity, employment rate
122
What is the intensive margin
When you have decided whether to work or not, how much do you do
123
Extensive margin
Your decision to work or not
124
What are the utility inputs for the labour supply decision
Consumption and hours worked (negative utility)
125
When is labour supply optimised
When the marginal rate of substitution equals the relative price
126
What is the effect of an increased tax rate on the number of hours worked?
It depends - income effect causes increase in hours worked, substitution effect leads to a decrease
127
What is compensated elasticity?
The elasticity without income effect (sub effect only)
128
What is the income elasticity?
The income effect elasticity
129
What is the uncompensated elasticity?
Combined income and substitution effect elasticity
130
What is the shape of the individual labour supply curve?
Backwards bending
131
Traditional convexity model of labour supply - what is the impact of small tax change
Small change in labour supply
132
What does convexity mean in graph theory
All points within a plane can be connected with a straight line that is all within the plane
133
Issues with empirically estimating labour supply
Omitted variable biases, reverse causality
134
Which policy did the EISSA labour supply study analyse?
The Tax Reform Act of 1986
135
What were the findings of the EISSA study?
Labour supply elasticity estimated at .9, but no statistical significance
136
Issues with the EISSA study?
Poor statistical significance, the suboptimal control group for the diff-in-diff
137
What does the budget line look like with the EITC?
“Humped” - with phase in and phase out
138
Issue with the EITC study
Single women already very high workforce participation
139
What is the informational constraint
We would like to provide “means tested” benefits based on earnings capacity, to avoid moral hazard. However, we have to use income as “second best”
140
What is tagging?
Observable characteristics that are correlated with earnings capacity that are not behaviourally responsive, used to choose apply benefits
141
What are ordeals
A process that you have to go to get a benefit - used for screening processes
142
Research on ordeals
Some reduced demand occurs with ordeals but doesn’t seem to target the policy better
143
What is the immigrant population of the UK and the US
Both 13-15%
144
What variation do we introduce in the migration model?
Idiosyncratic preferences for locations - people have “likes”
145
In the migration model, are wages endogenous or exogenous?
Endogenous - taxes and the migration rate will impact the wage
146
How do we study tax impacts on migration?
Variation on tax rates causing migration - using people’s tax records
147
Kleven, Landais, and Saez (2011)
Study of football players and changes in tax rates
148
Football study, Bosman rule
Removal of restrictions on transfers in football, lets people make more “optimised” decisions
149
Issue with the football study
Tax rate irrelevancy, correlation could be coincidental
150
What was the unique identification strategy used in the “Beckham Scheme” football taxation study?
Synthetic diff-in-diff
151
Issue with the “Beckham Scheme”
Introduction of Beckham is significant in itself, as it gives value to the league. Also, general equillibria effects
152
What were the findings of the Danish tax study?
High skill, sports, entertainers all reacted strongly to tax changes. Also, foreign workers are more tex elastic than domestic workers
153
Issues with migration benefits study
Financial policies may be correlated with non-financial policies - hard to identify which ones are reducing the migration levels
154
Migration - Danish welfare payments study
Diff-in-diff comparing EU and Non-EU immigration after a policy that impacted the welfare recieved by non EU migrants
155
Danish Welfare for migrants study - results
Non EU migrants did drop significantly due to the reduced welfare policy
156
What is the tax base?
The total of all taxable income
157
Definition of the Elasticity of Taxable Income
Percentage change in taxable income over a percentage change in taxation
158
Where does taxable income response come from?
Labour income (choice of work), Capital income (choosing low-tax assets), Tax avoidance (legal manipulation of income), tax evasion (illegal under-reporting of income)
159
What is the issue with a high ETI?
Means that taxation will be less efficient, more deadweight loss
160
What is the top income share?
The share of income that is earned by high earners
161
US trend in top 1% income share in terms of marginal tax
As the marginal tax rate has fallen, the income share of the top 1% has risen
162
Difference between top 1% and others (ETI)
Top 1% can adapt their taxable income to the level of marginal tax rate significantly, whereas others cannot
163
How do we empirically study the impact of the tax rate on the top 1%
Diff in diff, using the population (or bottom 99% is better imo), as a control
164
Findings of the ETI diff-in-diff model (US)
Top 1% were more responsive than the control, hard to tell magnitude
165
How did the UK ETI study and the US study vary?
UK used 95-99% as control, US used total income
166
Weakness of ETI studies
Could be non-tax reasons for changes, weakening unions, globalisation, social norms etc. that correlate with the changes in tax studied
167
Function for the change in taxable income for the top percentiles (ETI)
Log of taxable income = elasticity of taxable income*log change in tax plus a function of time (fixed effects).
168
Elements of the high-income laffer rate
Mechanical change in revenue + Behavioural change in revenue
169
UK high-income laffer rate - estimated tax rate
0.5
170
Another type of study for ETI
Bunching study at tax kinks
171
What is a fiscal externality?
Behavioural adaption to tax leads to lower tax revenue for the government
172
Why is there welfare loss of income tax
Behavioural changes lead to a move away from the natural equilibrium, which causes lower welfare
173
What determines the behavioural impact of an income tax change
Labour supply elasticity
174
What is the marginal deadweight loss at tax rate 0?
0
175
Optimal tax income tax problem - setup
Objective welfare structure, by setting tax T(z) where z is earnings, with a budget constraint
176
Simple tax model for optimum income tax rate
Constant tax rate, with a guaranteed income
177
What does a Rawlsian (maximin) welfare function imply for the optimum tax
Maximise tax income, with maximum level of G
178
In non-Rawlsian cases, where does the optimum level of tax fall - left or right of the laffer curve peak?
Left
179
Why do we impose commodity taxes?
Satisfy a revenue requirement, progressive redistribution, correction of externalities, correction of internalities
180
Commodity taxation - deadweight loss
Behavioural change in consumption of the good
181
Expression for marginal deadweight loss for commodities
Tax as a proportion of price x elasticity of demand x quantity of consumption
182
Ramsey optimal tax model - setup
One representative consumer, consumers like leisure and commodities x1 to xn, each good can have a tax, governments have a revenue goal, and want to maximise welfare subject to the revenue goal
183
Ramsey optimal tax model - assumptions
No income effects or cross-market effects (demand for commodities are only a function of the price of that good),
184
Key result of the Ramsey rule
Every commodity will have the same marginal deadweight loss of raising funds - we should tax inelastic goods higher than elastic goods
185
What defines the tax rate on a good in the Ramsey Rule
The elasticity of the good (inverse elasticity rule)
186
Issues with the feasibility of the Ramsey model
Knowing the elasticities, the complexity of admin, introducing new goods for tax purposes, lobbying and corruption
187
The expression for taxes in the equity concerned Ramsey rule
Inverse elasticity x equity weight
188
Ramsey rule - equity/efficiency tradeoff
In the equity inverse elasticity rule, goods that we weight higher (goods consumed by poorer people) are often more inelastic, so the equity concerns and the elasticity fight against each other
189
Why do we care about capital taxation
Unequal distribution, less meritocratic (and therefore does not provide good motivation), capital accumulation is good for growth, key for efficiency
190
Why is capital becoming more important
Wealth to income ratio increasing, capital share also increasing
191
Distribution of household wealth
Top 1% has ⅓, 1-10% has ⅓, 11-100% has ⅓, financial wealth more unequal than assets
192
US vs Europe - wealth inequality
Pre-1970 - Europe was less equal, Post-1970, US in now less equal
193
Savings and Inheritence model - setup
Wealth is a function of return, wealth yesterday, earnings, inheritance, and negative consumption, total wealth is the summation of income - outgoings, adjusted to the return on investment, then can be split into lifecycle and inheritance
194
Comments on inheritance post 1970
Has been returning in importance as a percentage of GDP
195
Ways to tax capital
Corporate income tax, individual income tax, estate and gift taxes, property taxes
196
Two-period model for capital taxation
Two periods with discount for the future, utility based on consumption and leisure. We can save with interest
197
What is the marginal rate of substitution between two periods?
MRS = the cost of transfer between periods, which = return on capital
198
Labour and consumption tax in the two period model
Can be set to be equivalent in terms of consumption and behavioural distortion
199
What is the effect of a tax on savings/wealth?
Less spending in the second period, equivalent to a fall in the return on capital
200
How do “lenders” and “borrowers” differ when the interest rate changes?
The income effect acts positively for lenders, and negatively for a borrower
201
What are the impacts of capital (savings) taxes on overall changes?
Always ambiguous, due to borrowers and lenders cancelling each other out
202
Behavioural responses to inheritance tax
Reduced wealth accumulation, reduces labour supply of donors, increases labour supply of donees (due to income effects)
