Unit 3 - Social Welfare and Insurance

Question 1

What outcomes should we care about/are good measures of well-being?

Answer 1

earnings, income, consumption, wealth, health

Question 2

earnings

Answer 2

Main source of income for most people; easy to measure
from a job

Question 3

income

Answer 3

More comprehensive than earnings; fairly easy to measure
from all sources - wages, investments, businesses, rental property

Question 4

consumption

Answer 4

Public/private transfers, savings/dissavings

This goes into utility function; harder to measure

includes
-spending (what to buy)
-economist’s view: people care about this
utility (happiness) = f(good 1, good 2)
savings - adding to pile of wealth (not everyone can effect)
dissavings - taking $ out of pile of wealth to spend ASAP

Question 5

wealth

Answer 5

Why save?
A) shocks;
B) future consumption (retirement)
C) kids
Comprehensive utility function includes all of this

Question 6

health

Answer 6

Value for itself + affects your productivity (earnings)

Question 7

absolute poverty measures

Answer 7

Poor if income < threshold level (poverty line)

Question 8

absolute poverty threshold line in the US

Answer 8

2022: $27,750 for family of 4 (depends on family size)
How we got here: 1960s food budget x 3 + inflation

Question 9

World Bank absolute poverty threshold line

Answer 9

$2.15/day (extreme poverty)

Question 10

potential issues with absolute poverty measures

Answer 10

Arbitrary; people just above line are not well off

May not be a “living wage” that covers actual costs; regional differences in cost-of-living

May not include transfers (not consumption)

Keeps up with inflation but not rising wages

Question 11

Relative poverty measures

Answer 11

poor if income < 50% of median income (or some %)

Question 12

advantage of relative poverty measures

Answer 12

cutoff rises with wages, not inflation
But could have some of same other issues as poverty line

Question 13

Inequality measures

Answer 13

90-10
Shares of income held by different quintiles of income distribution

Question 14

90-10

Answer 14

ratio of income at the 90th percentile of the income distribution to 10th percentile (or 90-50, 50-10)

Question 15

Shares of income held by different quintiles of income distribution

Answer 15

e.g., lowest 20% vs. highest 20% (or use groups other than quintiles; measure shares of wealth)

Question 16

advantage of relative inequality measures

Answer 16

may be useful to compare well-being of least well-off to high (not just median) earners

Question 17

economic mobility

Answer 17

Measure the probability that people in one quintile of family income as a child end up in each of the income quintiles as an adult

Question 18

Why do we care about mobility?

Answer 18

Equality of opportunity requires that people can end up somewhere different from where they started

Question 19

Public Good

Answer 19

Redistribution is a ____; private provision too little

Question 20

Social insurance

Answer 20

Part of economic success is due to luck, want to have a system that insures us against it
There will not be a market for insurance against poverty

Question 21

Egalitarianism

Answer 21

Everyone has a right to a basic level of certain goods (e.g, food, housing, health care, education)

Question 22

Rawls’ “Veil of Ignorance”

Answer 22

If you did not know what position you would have in society, you would want a more egalitarian society

Question 23

How to Redistribute?

Answer 23

Cash vs. in-kind
Categorical vs. means-tested
tax credits vs spending programs

Question 24

cash

Answer 24

All the assets in your account will be sold and the cash proceeds will be transferred.

Question 25

in-kind

Answer 25

our existing investments and any cash will be moved over as-is — nothing will be sold.

Question 26

Categorical

Answer 26

eligible if belong to a category (e.g., single parent)

Question 27

Means-tested

Answer 27

eligible if income or assets < cutoff

Question 28

programs can be both..

Answer 28

categorical and means-tested

Question 29

Tax credits vs. spending programs

Answer 29

Refundable credits more useful in cases where people have no federal income tax liability

Question 30

Social Security spending

Answer 30

$1 trillion –> social insurance

Question 31

Health care spending

Answer 31

$1 trillion

Question 32

Defense spending

Answer 32

$700 billion –> public good

Question 33

International aid

Answer 33

$50 billion –> public good

Question 34

Environment

Answer 34

$12 billion –> externalities (i.e. gov’t fund to clean up toxic waste)

Question 35

Food assistance

Answer 35

$100 –> redistribution

Question 36

externality doesn’t meet public good because

Answer 36

not non-rival and non-excludable

Question 37

insurance

Answer 37

pay a premium
provides coverage in case of certain bad events that could happen
insurance company pays benefit
can have a deductible or repayment

Question 38

premium

Answer 38

the amount you pay for an insurance policy

Question 39

benefit

Answer 39

paid by insurance company in case a bad event does happen

Question 40

deductible

Answer 40

you pay first $X of cost, insurance kicks in often

Question 41

repayment

Answer 41

you pay first $X of each doctor’s visit (even after you meet your insurance)

Question 42

diminishing marginal utility of income

Answer 42

as an individual’s income increases, the extra benefit to that individual decreases

Question 43

If people have diminishing marginal utility of income,

Answer 43

they prefer to be fully protected against risks

Question 44

social insurance

Answer 44

provided by gov’t

Question 45

common characteristics of social insurance programs

Answer 45

mandatory participation
individuals and/or their employees make contributions
benefits are tied to an event (i.e. needing health care)
benefits available to contributors (even rich people)

Question 46

unemployment insurance

Answer 46

SI program that protects against job loss

Question 47

health insurance (Medicare/Medicaid)

Answer 47

SI program that protects against illness + medical expenses

Question 48

Social Security

Answer 48

SI program that protects against disability and living too long (risk of outliving resources)

Question 49

Why should gov’t provide insurance?

Answer 49

private insurance markets may not function well, makes everyone participate

Question 50

Problems with private insurance markets

Answer 50

people differ in risk type (low or high)
insurer doesn’t observe risk type, so they offer insurance at 1 price to everyone. this is a good deal for high risk buyers.

Question 51

why is it bad for low risk buyers to get insurance?

Answer 51

their risk type is not protected, even though they like insurance

the premium will still have to rise and insurance may become unaffordable/not exist at all

caveat: They’re still needed to make the insurance market function

Question 52

other reasons for gov’t provision

Answer 52

externalities
economies of scale
behavioral economics/paternalism

Question 53

externalities

Answer 53

i.e. health care, if people are in distress, they can’t be turned away even if they don’t have insurance

Question 54

economies of scale

Answer 54

1 big gov’t is cheaper to run than small private insurance companies

Question 55

behavioral economics/paternalism

Answer 55

may not purchase due to various biases even though they do value insurance

Question 56

drawbacks of any insurance (not just SI)

Answer 56

moral hazard
a lot more visits will be done if P is free

key point: tradeoff between best protection from risk (no copay) & giving good incentives to use core property (copay)