Unit 3 - Social Welfare and Insurance Flashcards
What outcomes should we care about/are good measures of well-being?
earnings, income, consumption, wealth, health
earnings
Main source of income for most people; easy to measure
from a job
income
More comprehensive than earnings; fairly easy to measure
from all sources - wages, investments, businesses, rental property
consumption
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
wealth
Why save?
A) shocks;
B) future consumption (retirement)
C) kids
Comprehensive utility function includes all of this
health
Value for itself + affects your productivity (earnings)
absolute poverty measures
Poor if income < threshold level (poverty line)
absolute poverty threshold line in the US
2022: $27,750 for family of 4 (depends on family size)
How we got here: 1960s food budget x 3 + inflation
World Bank absolute poverty threshold line
$2.15/day (extreme poverty)
potential issues with absolute poverty measures
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
Relative poverty measures
poor if income < 50% of median income (or some %)
advantage of relative poverty measures
cutoff rises with wages, not inflation
But could have some of same other issues as poverty line
Inequality measures
90-10
Shares of income held by different quintiles of income distribution
90-10
ratio of income at the 90th percentile of the income distribution to 10th percentile (or 90-50, 50-10)
Shares of income held by different quintiles of income distribution
e.g., lowest 20% vs. highest 20% (or use groups other than quintiles; measure shares of wealth)
advantage of relative inequality measures
may be useful to compare well-being of least well-off to high (not just median) earners
economic mobility
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
Why do we care about mobility?
Equality of opportunity requires that people can end up somewhere different from where they started
Public Good
Redistribution is a ____; private provision too little
Social insurance
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
Egalitarianism
Everyone has a right to a basic level of certain goods (e.g, food, housing, health care, education)
Rawls’ “Veil of Ignorance”
If you did not know what position you would have in society, you would want a more egalitarian society
How to Redistribute?
Cash vs. in-kind
Categorical vs. means-tested
tax credits vs spending programs
cash
All the assets in your account will be sold and the cash proceeds will be transferred.
in-kind
our existing investments and any cash will be moved over as-is — nothing will be sold.
Categorical
eligible if belong to a category (e.g., single parent)
Means-tested
eligible if income or assets < cutoff
programs can be both..
categorical and means-tested
Tax credits vs. spending programs
Refundable credits more useful in cases where people have no federal income tax liability
Social Security spending
$1 trillion –> social insurance
Health care spending
$1 trillion
Defense spending
$700 billion –> public good
International aid
$50 billion –> public good
Environment
$12 billion –> externalities (i.e. gov’t fund to clean up toxic waste)
Food assistance
$100 –> redistribution
externality doesn’t meet public good because
not non-rival and non-excludable
insurance
pay a premium
provides coverage in case of certain bad events that could happen
insurance company pays benefit
can have a deductible or repayment
premium
the amount you pay for an insurance policy
benefit
paid by insurance company in case a bad event does happen
deductible
you pay first $X of cost, insurance kicks in often
repayment
you pay first $X of each doctor’s visit (even after you meet your insurance)
diminishing marginal utility of income
as an individual’s income increases, the extra benefit to that individual decreases
If people have diminishing marginal utility of income,
they prefer to be fully protected against risks
social insurance
provided by gov’t
common characteristics of social insurance programs
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)
unemployment insurance
SI program that protects against job loss
health insurance (Medicare/Medicaid)
SI program that protects against illness + medical expenses
Social Security
SI program that protects against disability and living too long (risk of outliving resources)
Why should gov’t provide insurance?
private insurance markets may not function well, makes everyone participate
Problems with private insurance markets
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.
why is it bad for low risk buyers to get insurance?
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
other reasons for gov’t provision
externalities
economies of scale
behavioral economics/paternalism
externalities
i.e. health care, if people are in distress, they can’t be turned away even if they don’t have insurance
economies of scale
1 big gov’t is cheaper to run than small private insurance companies
behavioral economics/paternalism
may not purchase due to various biases even though they do value insurance
drawbacks of any insurance (not just SI)
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)
