Public Finance Final | ECON - Public Finance, Quizzes of Public finance

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TERM 1 Unemployment Insurance Replacement Rate DEFINITION 1 The ratio of unemployment insurance benefits to pre- unemployment earnings-Higher replacement rate corresponds to more generous insurance-Shows the benefits of unemployment insurance-Crowds out private saving, if the govt. gives you $1 you drop the amount of savings you spend by $1 ( TERM 2 Factors effecting the importance of social insurance for consumption smoothing DEFINITION 2 -Predictability of the event: easier to self-insure against predict able events-Cost of the event: easier to self-insure against low-cost events TERM 3 Moral Hazard DEFINITION 3 Adverse actions taken by individuals or producers in response to insurance against adverse outcomes-The existence of moral hazard means that it may not be optimal for the government to provide the full insurance that is demanded by risk-averse consumers TERM 4 Four Important Types of Moral Hazard DEFINITION 4 -Reduced precaution against entering the adverse state (less protection against risk)-Increased odds of entering the adverse state (do something risky)-Increased expenditures when in the adverse state-Supplier responses to insurance against the adverse state TERM 5 Two reasons moral hazard is costly DEFINITION 5 -The adverse behavior encouraged by insurance lowers social efficiency because it reduces the provisions of socially efficient labor supply-When social insurance encourages adverse events, which raise the cost of the social insurance program, it increases taxes and lowers social efficiency further TERM 6 Social Security DEFINITION 6 A federal program that taxes workers to provide income support to teh elderly-Financed through the Federal Insurance Contributions Act (FICA) tax on their earnings-A person must have worked and paid this payroll tax for 40 wuarters (10 years) over their lifetime, and must be age 62 or older-Beneficiaries receive annuity payments (payment htat lasts until the recipient's death) TERM 7 Pay-as-you-go pension DEFINITION 7 unfunded; workers pay contributions which go to the current retirees TERM 8 Fully Funded Pension System DEFINITION 8 -As a worker your money(social security tax) is put in a pension fund, used for capital accumulation-Does not go to current retirees-When you retire you get this money back, return depends on how good the portfolio you selected did on the stock market TERM 9 Size of Annuity Payment DEFINITION 9 -Dependent on the recipient's average earnings over the 35 highest earning years, called the Average Indexed Monthly Earnings, AIME TERM 10 Why choose 35 years? DEFINITION 10 -No penalty for low-earning years early in career-Not too large a benefit for high earning years late in career-If there is too short a window people abuse it--ex: bus driver workings 25 hour shifts to maximize pension payment--ex: Brazilian public employees receiving promotions right before retirement TERM 21 Consumption Smoothing DEFINITION 21 The translation of consumption from periods when consumption is high, and thus has low marginal utility, to periods when consumption is low, and thus has high marginal utility TERM 22 Expected Utility Model DEFINITION 22 The weighted sum of utilities across states of the world, where the weights are the probabilities of each state occurring-EU=p*U(consumption with adverse event)+(1- p)*U(consumption without adverse event TERM 23 Actuarially fair premium DEFINITION 23 Insurance premium that is set equal to the insurers expected payout TERM 24 Information Asymmetry DEFINITION 24 The difference in information that is available to sellers and topurchasers in a market. TERM 25 Adverse Selection DEFINITION 25 The fact that insured individuals know more about their risk level than does the insurer might cause those most likely to have the adverseoutcome to select insurance, leading insurers to losemoney if they offer insurance TERM 26 Risk Premium DEFINITION 26 The amount that risk-averse individuals will pay for insurance above and beyond the actuarially fair price TERM 27 Pooling Equilibrium DEFINITION 27 A market equilibrium in which all types of people buy full insurance, even though it is not fairly priced to all individuals TERM 28 Separating Equilibrium DEFINITION 28 A market equilibrium in which different types of people buy different kinds of insurance products designed to reveal their true types. TERM 29 Experience rating DEFINITION 29 Charging a price for insurance that is a function of realized outcomes TERM 30 Administrative Costs DEFINITION 30 Government-run Medicare has much lower administrative costs than private insurance. TERM 31 Paternalism DEFINITION 31 Governments may feel that people would choose to buy too little insurance for themselves TERM 32 Self-Insurance DEFINITION 32 The private means of smoothing consumption over adverse events, such as through ones own savings, labor supply of family members, or borrowing from friends TERM 33 Crowd-Out Effect of Social Security DEFINITION 33 When workers benefits are cut, 30-40% of the decrease in SSW is offset by increased private savings TERM 34 Costs and Benefits of working an additional year at age 62 DEFINITION 34 Costs: implicit tax--pay an extra year of payroll taxes on her earnings--receives one year less of Social Security benefitsBenefits: benefit adjustment--get an additional 8%-- Higher Social Security benefit level through the actuarial adjustment TERM 35 Effects of programs that penalize additional work DEFINITION 35 -Costly to design Social Security systems that penalize additional work beyond the retirement age-Adjusting systems to more fairly reward work at old ages can mitigate much of the moral hazard effect of Social security TERM 46 Disability Insurance DEFINITION 46 A federal program in which a portion of the Social Security payroll tax is used to pay benefits to workers who have suffered a medical impairment that leaves them unable to work TERM 47 Workers' Compensation DEFINITION 47 State-mandated insurance, which firms generally buy from private insurers, that pays for medical costs and lost wages associated with an on-the-job injury TERM 48 No-fault insurance DEFINITION 48 When there is a qualifying injury, the workers compensation benefits are paid out by the insurer regardless of whether the injury was theworkers or the firms fault.-reduces transaction costs since no lawsuits are needed TERM 49 Duration of Social Insurance Benefits DEFINITION 49 -Moral hazard: increases with length of insurance, incentive for less insurance-Consumption Smoothing: increases with length of insurance, incentive for more insurance-People will not try to find a job if insurance lasts too long etc. TERM 50 Job match quality DEFINITION 50 The marginal product associated with the match of a particular worker with a particular job-Wages SHOULD increase with UI generosity-Wages do not increase with UI generosity, suggesting UI does not improve match quality TERM 51 Moral Hazard in Disability Insurance DEFINITION 51 -Example in Canada: replacement rate increased for disabled workers from 25-33%, participation rates of older men in labor force declined as benefits increased-Response was modest relative to the enormous 36% increase in benefits- Impliedelasticityof labor supply with respect to benefits of 0.3 TERM 52 Partial Experience Rating and Layoffs DEFINITION 52 -Subsidizes them--Workers: a temporary layoff is some time off at a partial wage--a partially paid vacation--Firms: the attractiveness of a temporary layoff depends on the extent of experience rating TERM 53 Filling Gaps in Medicare Coverage DEFINITION 53 -Low income individuals have Medicaid-About one third of all retirees have health insurance from their former employers- May retirees buy individual "Medi-gap" policies from insurance companies----These three means of filling gaps have a negative financial externality on the Medicare program (by increasing the use of the care TERM 54 Long-term care DEFINITION 54 -Health care delivered to the disabled and elderly for their long- term rather than acute needs either in an institutional setting (a nursing home) or in their homes-Delivered mainly in institutional care (nursing homes) and by nurses and other aids in home health care-Medicaid covers long-term care, but to become eligible, individuals must first spend all their assets-Not covered by Medicare and represents 8.5% of all health care costs TERM 55 Single Payer System DEFINITION 55 -Some argue for a single payer system Government-provided health insurance for all Guarantees full coverage Low administrative costs Eliminates inequality in care Straightforward to control costs by budgeting TERM 56 Disadvantages of Single Payer (public) system DEFINITION 56 -Dramatically increases government expenditure-Budgeting a blunt instrument-Severe political hurdles from health insurance companies-Some push for a private sector solution, maybe with subsidies--adverse selection, no evidence private sector can contain costs TERM 57 Massachusetts Experiment with Incremental Universalism DEFINITION 57 -In 2006, Massachusetts pushed to cover remaining 8% wihtout insurance-"Three legged stool" approach Ban pre-existing conditions exclusion, and ban health-based pricing Individual mandate, avoiding adverse selection (legally required employers to offer insurance for individuals to obtain some type of insurance coverage Subsidized/free insurance for low-income familes -Premiums in the non-group market fell by half, uninsurance rate low TERM 58 Affordable Care Act DEFINITION 58 -Obamacare, 2010, adopted "three legged stool approach"- Prices are community rated not health specific-Individuals are mandated to buy-Medicaid expanded with subsidies to low income people-Expected to cost $1 trillion dollars over the next decade-Includes substantial effort to reduce cost TERM 59 Personal Responsibility and Work Opportunity Reconciliation Act DEFINITION 59 -Before, states received matching grants, gave time unlimited cash benefits to low income single mothers-After, states received a lump sum block grant to provide time- limited benefits to a broader range of low-income families TERM 60 Relative Income Inequality DEFINITION 60 The amount of income the poor have relative to teh rich-It's increased in the US since the 1960s TERM 71 Increasing Outside Options (to help single mothers) DEFINITION 71 -Training: Modest declines in welfare use, earnings increases-Labor Market Subsidies: Increase employment, reduces welfare use-Child Care: increase's mother's employment-Child Support: shifts burdens to "deadbeat dads"Canadian subsidy to random group on welfare increased employment by 43% in short-run, rate of welfare enrollment fell by roughly the same amount, after 5 years the impact on employment welfare use fell to zero TERM 72 Welfare Lock DEFINITION 72 For many low-income mothers, health insurance is tied to non-wrk, through Medicaid, so incentive to not work--untying links between in-kind and cash benefits increases the value of working--Under current system working more than a small amount produces a large penalty from lost Medicaid benefits TERM 73 Changes due to Welfare Reform DEFINITION 73 1. Cash welfare was changed from an entitlement to a block grant2. States were allowed, and encouraged, to experiment with alternative structures of cash welfare payments3. Time limits were imposed on welfare recipients4. Work requirements were imposed on welfare recipients5. New efforts to limit unwed motherhood were introduced TERM 74 Was Welfare reform a success? DEFINITION 74 Success depends on whether-increased costs for a small share of women exceed the gains from reduced government welfare spending-Value of fallen leisure of single mothers- How well the new program fares in the recession, as opposed to the boom in which it was passed-How it affects children in welfare-eligible families TERM 75 Labor Market: Employment Protection Legislation DEFINITION 75 -Procedural inconveniences: characterize the complexity of the procedures needed to issue a dismissal notice-Notice and severance payments requirements: assess the time between the decision to layoff a worker and its effective dismissal as well as the cost of dismissal-Difficulty of dismissal: measures the relevance of litigation costs and any possible bias in the judicial enforcement process TERM 76 Why have EPL? (and why not) DEFINITION 76 1) Protect workers against turnovers, but now world has become unstable due to technology, innovation, and globalization2) Protect workers from unfair dismissalEPL prevents firing workers when you need them, in turn prevents hiring workers. You need to switch from EPL (job protection) to protection of the people TERM 77 Fixed-Term vs. Regular Employment DEFINITION 77 -Many companies have implemented fixed-term contracts (where people work temporarily for a set period of time that are completely unprotected)--can hire these workers if demand for product expanded, and they don't get fired their contract just ends (like hiring around Xmas)-Regular employees are very much protected TERM 78 Product Market Regulation DEFINITION 78 -State Control-Barrier to Entrepreneurship, administrative and competition-Barrier to Trade and Investment, foreign;Protected workers typically live in countries with protected firms (correlation)--globalization will put a lot of pressure on these companies in teh future TERM 79 TINA Reforms (There Is No Alternative) DEFINITION 79 -Can only occur in global economic necessity, contrast to economic point of view that reform should occur in a good period where the losers can still be compensated--Also why would you want to reform in a good period, when people are doing well, even if it's smart-TINA says reforms are done in bad times, even if it is not the smartest from an economic standpoint TERM 80 Payroll Tax DEFINITION 80 A tax levied on income earned on one's job-Borne fully by workers TERM 81 Individual Income tax DEFINITION 81 A tax paid on individual income accrued during the year- borne fully by the households TERM 82 Corporate Income Tax DEFINITION 82 Tax levied on the earnings of corporations TERM 83 Wealth taxes DEFINITION 83 Taxes paid on the value of the assets held by a person or family TERM 84 Property taxes DEFINITION 84 A form of wealth tax based on the value of real estate TERM 85 Estate taxes DEFINITION 85 A form of wealth tax based on the value of the estate left behind when one dies TERM 96 Withholding DEFINITION 96 The subtraction of estimated taxes owed directly from a worker's earnings TERM 97 Refund DEFINITION 97 The difference from the amount withheld from a worker's ending and the taxes owed if the former is higher d TERM 98 Alternative Minimum Tax DEFINITION 98 A tax schedule applied to taxpayers with a high ratio of deductions and exemptions to total income--requires that income (before subtracting exemptions and deductions) be taxed at 26% or more--allows for $33,750 single deduction for individuals and $45,000 for joint filers, not indexed for inflation, aka people have to pay more and more taxes TERM 99 Vertical Equity DEFINITION 99 The principle that groups with more resources should pay higher taxes than groups with fewer resources-Social welfare is maximized when those who have a high level of consumption, and thus a low marginal utility, are taxed more heavily, and those who have a low level of consumption, and thus a high marginal utility are taxed less heavily TERM 100 Horizontal equity DEFINITION 100 The principle that similar individuals who make different economic choices should be treated similarly by the tax system TERM 101 Progressive DEFINITION 101 Tax systems in which effective average tax rates rise with income TERM 102 Proportional DEFINITION 102 Tax systems in which effective average tax rates do not change with income so that all tax payers pay the same proportion of their income in taxes TERM 103 Regressive DEFINITION 103 Tax systems in which effective average tax rates fall with income TERM 104 Political Process of Measuring Tax Fairness DEFINITION 104 -Fairness is ambiguous, politicians pick the meaning that best suits them-Bush signed into law income tax cuts by Congress in 2003, 44% of the tax cuts when to the top 1% of payers-But top taxpayers pay 38% of income taxes, but only 30% of all taxes TERM 105 Haig-Simons Comprehensive Income Definition DEFINITION 105 Taxable resources are an individual's ability to pay (i.e. potential annual consumption)--potential annual consumption: total consumption during the year, plus any increases in wealth- Difficulties: defining power to consumption/ability to pay, non- consumption expenditures-Promotes horizontal equity by treating all income equally, one reason for deviation is to account for not associated with desired consumption, ex: deductions for property and casualty losses, medical expenditures, state and local tax playments TERM 106 Reasons to deviate from Haig Simons DEFINITION 106 -To correct externalities, for instance charitable giving likely under provided-EX: people may give to a homeless shelter only because it is tax deductible, otherwise homeless shelters would be underfunded-Alternative: the govt could provide homeless shelters itself? If the govt subsidizes homeless shelters, the amount of private charitable giving to those shelters would most likely fall TERM 107 Marginal Impacts DEFINITION 107 Changes in behavior the government hopes to encourage through a given tax incentive TERM 108 Inframarginal impacts DEFINITION 108 Tax breaks the government gives to those whose behavior is not changed by new tax policy TERM 109 Tax Subsidies vs Direct Spending DEFINITION 109 -Mathematically, the govt. should use a tax break instead of direct spending if:-The increase in charity per $ of tax break> 1-Reduction in charity per $ of govt. spending-If this holds, then giving more of a tax break (and reducing govt spending) increases charitable giving TERM 110 Consumer Sovereignty vs. Imperfect Info DEFINITION 110 -Direct govt. provision imposes preferences about how funds are spent-Tax subsidies to private individuals respects the preferences of citizens-But the private sector may not have the tools to ensure efficient distribution of charitable spending TERM 121 Medicaid DEFINITION 121 A federal and state program that provides health care for the poor-Targeted to those who qualify for cash welfare programs- Most low-income children in the US-Most low-income pregnant women-The low-income elderly and disabled-It's required to cover physician and hospital care, states also cover dental and prescription drugs-Low reimbursement for providers, many physicians refuse to see Medicaid patients-Increases in eligibility crowds out 20-50% of private insurance TERM 122 Tricare DEFINITION 122 Administered by the Department of Defense-Serves military retirees and the families of active-duty, retired, or deceased service members TERM 123 Champva DEFINITION 123 Civilian Health and Medical Program for the Department of Veterans Affairs-A health care program for disabled dependents of veterans and certain survivors of veterans TERM 124 uncompensated care DEFINITION 124 The costs of delivering health care for which providers are not reimbursed TERM 125 Why are individuals uninsured? DEFINITION 125 -Insurance may cost too much, given risks and prices- Insurers may be unwilling to insure the worst risks because of fears of adverse selection-They are not appropriately valuing insurance coverage-physical externalities associated with communicable diseases-financial externality imposed by the uninsured on the insured TERM 126 Job Lock DEFINITION 126 The unwillingness to move to a better job for fear of losing health insurance-health insurance availability may inhibit productivity-increasing job switches-there are some laws that allow workers to purchase their employer provided health insurance after leaving their jobs TERM 127 First-dollar coverage DEFINITION 127 Insurance plans that cover all medical spending, with little or no patient payment-generous to patients-lots of moral hazard without much utility gain (because people can self- insure for small medical events) TERM 128 Optimal Health Insurance DEFINITION 128 -Trades off moral hazard against risk protection-First dollar coverage bad for moral hazard, not very valuable risk protection- Therefore, optimal health insurance policy individual bear a large share of medical costs within some affordable range Only fully insured against very large costs Most coverage is more generous than is optimal TERM 129 Tax subsidy (insurance) DEFINITION 129 For people with employer-sponsored health insurance, better to take payment in insurance than in wages TERM 130 Health savings account (HAS?) DEFINITION 130 A type of insurance arrangement whereby patients face large deductibles and they put money aside on a tax-free basis to prepay these deductibles-Designed to encourage smart health spending without raising taxes-Expensive tax break, flat deductible not the ideal insurance plan, doesn't fix tax deductibility of insurance coverage TERM 131 The Access Motive (insurance generosity) DEFINITION 131 -Moral hazard is measured only by the substitution effect of social insurance programs-Insurance might affect behavior through an income effect: people use care that is now affordable TERM 132 Psychological Motivations (insurance generosity) DEFINITION 132 There may be motivations for holding insurance that go beyond the simple expected utility model-Buying insurance perhaps commits to saving for health emergencies TERM 133 Retrospective Reimbursement DEFINITION 133 Reimbursing physicians for the costs they have already incurred-Encourages over utilization since providers are paid regardless of necessity or value of care TERM 134 Managed Care DEFINITION 134 An approach to controlling medical costs using supply-side restrictions such as limited choice of medical provider TERM 135 Preferred provider organization (PPO) DEFINITION 135 A type of managed care; health care organization that lowers care costs by shopping for health care providers on behalf of the insured-Avoids difficulty in shopping for doctors TERM 146 Oligopoly Markets DEFINITION 146 Markets in which firms have some market power in setting prices, but not as much as a monopolist TERM 147 Children's Health Insurance Program (CHIP) DEFINITION 147 Program introduced in 1997 to expand eligibility of children for public health insurance beyond the existing limits of the Medicaid program, generally up to 200% of the poverty line TERM 148 Health Care Utilization and Health DEFINITION 148 Medicaid still substantially reduces the number of uninsured so expansions may affect the utilization of health care services. It's eligibility increases preventive care and reduces infant mortality falls. Oregon lottery study confirms that Medicaid improves health overall. -Costs about $1 million/life saved TERM 149 Prospective Payment System (PPS) DEFINITION 149 Medicare's system for reimbursing hospitals based on nationally standardized payments for specific diagnoses-Diagnoses for hospital admissions grouped into 467 "Diagnosis Related Groups" (DRGs)-Each DRG receives a fixed payment, depending on cost of national cost of treatment and local expenses, but independently of actual treatment cost-Lowered cost growth in short run, but reported severity of admission diagnoses increased, aka hospital wanted more money, but also lead to cut in care to make money TERM 150 Premium Support (medicare) DEFINITION 150 A system of full choice among health care plans for Medicare enrollees whereby they receive a voucher for a certain amount that they can apply to a range of health insurance options either paying or receiving the difference between plan premiums and the voucher amount-encourages insurer competition, allows for choice, lets the market determine the appropriate reimbursement for plans-may lead to adverse selection TERM 151 Moral Hazard of a Means-Tested Transfer System DEFINITION 151 -Moral hazard arises because the govt. wants to redistribute to poor people, but people control their income-Lowering the Benefits Reduction Rate helps solve moral hazard--Instead of having the graph's slope becoming completely horizontal at a certain amount of hours of leisure, have it still slope downward slightly, so people still have motivation to work-Targeting benefits to earning capacity would eliminate moral hazard, make there be no way to change behavior in order to qualify and targets people with low earning capacity TERM 152 Two ways to protect individuals against the risks of being unemployed DEFINITION 152 -Provide unemployment insurance (UI)-To impose legal restrictions against dismissals (EPL)-A clear trade off between the use of EPL and UI exists TERM 153 What may cause growthless job creation? DEFINITION 153 Two potential explanations-Productivity: Reforms reducing unemployment benefits and minimum wages made more low-skilled workers marketable. It implies increased employment of low skilled workers-Flexibility: Employers exploit flexibility at the margin, hiring workers under temporary contracts. It implies increased employment of temporary workers TERM 154 Capital gains DEFINITION 154 Earnings from selling capital assets such as stocks, paintings, and houses TERM 155 Adjusted gross income (AGI) DEFINITION 155 An individual's gross income minus certain adjustments TERM 156 Taxable income DEFINITION 156 The amount of income left after subtracting exemptions and deductions from adjusted gross income TERM 157 Marginal Tax Rate DEFINITION 157 The percentage that is paid in taxes of the next dollar earned TERM 158 Average tax rate DEFINITION 158 The percentage of total income that is paid in taxes TERM 159 Equity Considerations (tax credit vs deduction) DEFINITION 159 -On vertical equity grounds, tax credits are more equitable than deductions-The value of a deduction rises with one's tax rate, making deductions regressive-Credits on the other hand, are available equally to all incomes so that they are progressive TERM 160 Tax Incidence DEFINITION 160 Assessing which party (consumers or producers) bears the true burden of the tax TERM 171 Effect of taxes on Labor DEFINITION 171 -The fall in the price of leisure induces a substitution effect toward less work-The fall in income has an income effect, so Ava buys less of all normal goods TERM 172 Taxes and Efficiency DEFINITION 172 -The market usually produces efficient outcomes, unless taxes are implemented-Deadweight loss is caused by individuals and firmsmaking inefficient consumption and productionchoices in order to avoid taxation-The more elastic supply and demand the more DWL-Tax smoothing produces less DWL than when taxes fluctuate between high and low TERM 173 Preexisting Distortions DEFINITION 173 Market failures, such asexternalities or imperfect competition, that are inplace before any government intervention TERM 174 Optimal Commodity Taxation DEFINITION 174 Choosing the tax ratesacross goods to minimize deadweight loss for a givengovernment revenue requirement TERM 175 Ramsey Rule DEFINITION 175 To minimize the deadweight loss of a taxsystem while raising a fixed amount of revenue, taxesshould be set across commodities so that the ratio ofthe marginal deadweight loss to marginal revenueraised is equal across commodities, that is, MDWLi/MRi= y-T=-1/E*y-T=optimal tax, E=elasticity of demand, y=constant- Lower taxes on goods with more elastic demand-Better to tax a wide variety of good moderately than a few goods heavily (broad base rule)-May lead to taxing goods purchased by poor TERM 176 Value of Additional Government Revenue DEFINITION 176 The valueof having another dollar in the governments handsrelative to its next best use in the private sector TERM 177 Optimal Income Taxation DEFINITION 177 Choosing the tax ratesacross income groups to maximize social welfaresubject to a government revenue requirement TERM 178 Tax Scope DEFINITION 178 -Tax incidence depends on how broadly the tax is applied- Taxes that are broader based are harder to avoid than taxes that are narrower, so the response of producers and consumers to teh tax will be smaller and inelastic-Harder to use a substitute instead TERM 179 Spillovers between Product Markets DEFINITION 179 A tax in one market leads to...-1. Income effect from lower real income-2. Substitution effect toward goods that are substitutes for the taxed good-3. Complementary effect: Consumers may reduce their consumption of goods or services that are complements to restaurant meals TERM 180 Progressive Tax Systems can be Less Efficient DEFINITION 180 -In a competitive labor market, wage equals the marginal product of labor, so the high-wage worker has a higher marginal product of labor-Society loses twice as much when the high-wage workers reduces her hours than when the low- wage worker reduces her hours TERM 181 Behavioral responses to taxes DEFINITION 181 As taxes rise on any one group individuals in that group may respond by earning less income-Poor people respond less to taxes, they cannot afford to "walk away" form work and get more leisure because taxes increase, yet rich people have enough income to consume more leisure (high elasticity) TERM 182 Tax-benefit linkages DEFINITION 182 Direct ties between taxes paid and benefits received