Pub Pol 304

Briefly describe two ways to measure the value of a life when conducting a cost-benefit analysis and for each way described, please describe a potential drawback to measuring the value life in this way.

(1) Lifetime Wages: Life is valued at the present discounted value of the lifetime stream of earnings Potential Problems Using wages to value life does not value any time that isn't spent working Life is more than wages and leisure (individuals may internalize the enjoyment derived by others from being alive). (2) Contingent Valuation: Ask individuals what their life is worth Potential Problem: yields a wide-range of inconsistent values. (3) Revealed Preferences: measured by how much individuals must be paid to take risky jobs that raise their chance of dying. Potential Problems: Imperfect Information: Depends on individuals' perception of risk (not actual risk). Fallacy of Misleading Vividness: Individuals understate large risk and overstate small risk. Difficult to isolate risk from other non-wage job characteristics One individual's revealed preference may not be representative of everyone.

Briefly describe two pieces of empirical evidence that suggests that social security influences people's retirement decisions, causing them to retire earlier.

(1) Time-series evidence suggests increased social security spending is associated with reductions on labor force participation of the elderly. Remember (from chapter 3) that interpreting time-series evidence where there is a steady change in one variable across time makes it difficult to determine causality (2) retirement age spikes at 62 (the early retirement age) and 67 (full retirement age). (3) International comparisons suggest that retirement spikes occur when benefit collections begin

Briefly describe two costs that occur when trying to transfer money from one group of people to another.

(1) administrative costs of enabling the transfer: competition for transfers along with administrative costs of enabling transfers means resources will be lost along the way when transfers occur (2) deadweight loss cost associated with taxing money from one group: Taking resources from a group to redistribute to other groups will cause the group from whom the resources are taken to produce less (3) the moral hazard cost associated with the recipients of a transfer: Those receiving the transfers might be encouraged to stay in a position that allows them to get the transfer

We discussed several problems with creating a randomized trial. Please describe at least two of them.

(1) expensive to do (2) takes a very long time to plan and execute (3) they can raise difficult ethical issues (4) the results are only valid for the sample of indivduals studied, which may be diff from the population at large (5) attrition: a non random sample of individuals may leave the experiment before it is complete which could bias the results

We discussed some limitations to the results found using randomized trials and quasi-experiments in chapter 3 of this class. Briefly describe 2 of these limitations.

(1) with quasi experiments there is never complete certainty that we have purged all bias from the treatment-control comparison (2) randomized trials and quasi experiments provide estimates of the causal effects of particular treatments; we can't extrapolate from a particular change in the environment to model all possible changes in the environment (3) randomized trails and quasi experiments can tell us how outcomes change when there is an intervention but often can't tell us why

Describe two ways in which the market may provide a public good in quantities at or closer to the socially optimal quantity.

1. Coase Bargaining / Private Agreements: A private contract that forces everyone to contribute to the public good (Example: Homeowner's Association) 2. Tying the public good to a private good (lighthouses and dock fees) 3. When individuals care enough about having the public good that they provide it themselves (when their income and enjoyment from the public good is high enough, 4. When individuals are altruistic and value the benefits and costs to others when making their own consumption decisions 5. The Warm-Glow Effect: When individuals care about both total amount of public goods and their particular contributions as well.

Briefly describe two common counting mistakes associated with calculating the costs and benefits of a public project.

1. Counting secondary benefits: focusing on an increase in one benefit without focusing on losses in other areas (should consider net increase in social surplus)2. Counting labor as a benefit: jobs created and wages paid are sometimes seen as a benefit (it should be counted as a cost)3. Double-counting benefits: If saving time translates to other benefits, officials might try to count both time saved and other benefits (should only count the saved time).4. Ignoring the "unseen": focusing on only the immediate costs and benefits (should also focus on the secondary costs and benefits)

Briefly describe two features of employer provided group health insurance that makes them a more attractive option than non-group coverage.

1. Employer based group coverage makes risk pools more predictable by removing adverse selection and increasing the size of the group, which takes advantage of the law of large numbers. 2. Group coverage over large groups will reduce average administrative costs since some of these costs are fixed and get spread out over more applicants. 3. Employee compensation is taxed in the form of wages but not in the form of health insurance. This means there is a large subsidy to purchasing insurance through your employer rather than on your own.

Describe two rationales for government getting involved in the insurance market other than the presence of asymmetric information. Give an example of each

1. Externalities: One person's lack of insurance could cause harm to somebody else. For example, people not having car insurance causes my premiums to be higher because I have to be insured against accidents caused by uninsured motorists (so government makes car insurance mandatory to legally drive a car). 2. Administrative Cost: Government has lower administrative costs compared to private insurers, which could lead to lower premiums. Medicare has administrative costs of about 2% of claims paid, while private sector companies average administrative costs of about 12.4% of claims paid. If you add administrative costs to the price of actuarily fair premiums, they will be lower under government administration given these figures. 3. Redistribution: Some people might prefer redistributing resources from the healthy to the sick. For example, genetic testing reduces some information gaps, but society might not tolerate those with bad genes having to pay higher premiums. 4. Paternalism: The government does not trust you to make good decisions for yourself, so they need to make good decisions for you. For example, forcing you to save for your retirement through social security (some people find this insulting, others find it necessary. It really just depends on the issue)

Describe two forms of government failure and give an example of each.

1. Lack of profit motive: the government is a monopoly in some of the services it provides and has no incentive to be as efficient as the private sector. It is the reason the DMV is often so slow and cumbersome compared to a private company. 2. Shortsightedness Bias: Politician prefer programs with current, visible benefits, even if the costs outweigh the benefits, so long as those costs are hard to identify or exist far out into the future. It is the reason we have amassed so much debt regardless of political party and why environmental policies often have difficulty passing. 3. Special interest effect: An issue that generates substantial benefits for a small group by generating minimal costs to a large group (and will be passed even if, in aggregate, losses exceed benefits). Any subsidy to farmers, sports stadium owners, or any other individual or company could fall into this category. 4. Crony Capitalism (corruption): This is when the government engages in favoritism for the sake of receiving some benefit in doing so. An example from class involved Serious Windows getting special government subsidies and endorsements while simultaneously giving campaign contributions to the administration granting them these favors.

Briefly describe two ways to measure the value of one's time when conducting a cost-benefit analysis and for each way described, please describe a potential drawback to measuring the value of time in this way.

1. Market Based Measures to Value Time: The value of time at work can be measured as the wage rate in a perfectly competitive labor market. Potential Problems: Can't freely trade off leisure and hours of work There may be non-monetary aspects of the job that cause people to value it differently than the wage. 2. Using Survey Based Measures to Value Time: Contingent Valuation: Asking individuals to value an option that they are not now choosing, do not have the opportunity to choose, or that is not yet available to them. Potential Problems: Isolation of Issue Matters: Example: when asked one question about what they would be willing to pay to improve visibility at the Grand Canyon, the give an answer five times higher than when this question was placed third in a list of other questions. Order of Issue Matters: Example: When asked how much people would pay to save seals and whales, seals were worth $142 and $195. If the order was reversed, whales are worth $172 and seals are worth $85. The embedding effect: People report a general value, not the value of a specific task. Example: Survey respondents place an equal value on saving 2,000, 20,000, or 200,000 birds. 3. Using Revealed Preferences to Value Time: Letting the actions of individuals reveal their valuation. Example: How much more will someone pay for an identical house 5 minutes closer to work can be used to determine the value of saving 5 minutes The problem with this approach is finding identical houses in different areas to make a fair comparison.

Briefly describe two of the challenges that may prevent two sides from reaching a Coasian bargaining solution when attempting to resolve an issue regarding a negative externality.

1.The Assignment Problem: appropriately assigning responsibility to the creator of the externality 2.The Holdout Problem: shared ownership of the property rights gives each owner power over all of the others. 3. Free-Rider Problem: Individuals tend to underinvest when that investment has a personal cost but a common benefit 4.Transaction costs have to be sufficiently low.

Describe two potential reasons for the government to get involved in providing a retirement plan as opposed to allowing people to make their own choices with their money in the market place.

1. Market failure in the annuities market due to asymmetrical information and adverse selection in that only those who plan to live a long time (and have more information than the insurance company that they will) are going buy annuities and so the insurance company will charge a price that most consumers would not pay. 2. Paternalism: The government is concerned that people won't save enough for their retirement. In reality, some do and some do not. Those who are married and have a college degree are more likely to save adequately for their retirement, while singe people without a college degree are less likely to do this. 3. Consumption smoothing: Annuities allow people to maintain a similar consumption pattern until they die.

The social security system has been described as unsustainable in that the accumulation of benefits it pays out to current retirees is greater than the accumulation of payroll taxes collected from current workers to fund they system. To fix this, either fewer benefits should be paid out or more taxes should be collected. Describe two ways we discussed in class to reduce the amount of benefits collected.

1. Reduce the annual increase in benefits from the CPI increase to the CPI increase minus 1 percent (which will have a greater negative effect on those who live longer) 2. Lower the rate at which taxes paid are translated into benefits 3. Reduce the benefits for higher income groups by raising the taxes collected on benefits for high income earners.

Describe two potential government interventions we discussed in class that might help the insurance market get closer to the social optimum. What is one common theme that these interventions share?

1. The government can incorporate an individual mandate and make everyone buy full insurance at the average price. Those more careful people would not like this plan as they are essentially taxed to support the risky behavior of others. Some people may prefer to have no insurance, but that choice gets taken away from them. 2. The government could offer centralized healthcare and provide full insurance for everyone, but if people are paying equally for this then the healthy careful people are still paying more than they would to subsidize the unhealthy people 3. The government could give everyone subsidies to buy private insurance. This has to be paid for and, again, if you charge everyone the same rate, then the healthy are paying for the unhealthy. The common theme all of these share is that they involve redistribution from healthy people to sick people, which can be unpopular and lead to perverse incentives

Describe two reasons for why there is greater political polarization in the United States in recent years.

1. There are increased feelings of polarization among voters due to a heightened sense of tribalism among different political parties (almost like a sports rivalry). 2. Medial Proliferation: The way information is consumed these days with people getting news stories according to an algorithm is a large contributor of the increasing polarization. This leads to confirmation bias where people have an initial belief and then seek out evidence to confirm it, rather than examining an issue from both sides (as this class has always endeavored to do). 3. Gerrymandering: gerrymandering has resulted in voting districts becoming more concentrated on one side or the other, which leads to increased polarization. 4. Other institutional changes such as pushing for stricter voter regulation laws, the increased importance of money in politics for campaign financing, and increased urbanization has created more political polarization in the United States

Briefly describe two incentives created by private property rights that are conducive for economic growth and development. For each incentive that you chose, give an example of that incentive in action.

1. Use your property in ways that benefit others: You have a tendency to turn your property into what other people value most (for example, you might turn your property into a parking lot or apartment complexes depending on what you feel the biggest need is). 2. Care for what they own: You tend to drive your car more carefully then a rental car and keep your yard cleaner than a communal park. 3. Make sure their property does not damage anybody else's property: You make sure your dog is on a leash since you are liable for the damages that the dog creates to others. 4. Conserve for the future: You have a tendency to make sure your assets last into the future, particularly if you think they will go up in value. In the absence of private property rights, people tend to take as much as they can as quickly as they can knowing that anything left behind will be taken by someone else.

Briefly describe two assumptions of the median voter theorem that are likely to be false and one piece of empirical evidence to suggest that the median voter theorem does not hold up in the real world.

1. that money does not have a major role in influencing elections 2. there are only two candidates running for office 3. that there is perfect information: voters have full information on the issues, politicians have knowledge o the issues, and politicians have knowledge of voter preferences 4. Voters are voting baed on a single issue, but in reality it is about a number of issues evidence: (Levitt, 1996): two senators from the same state, but different political parties, vote very differently and along party lines -- vote more in line with their party than what they think the median voter preferences are (Washington, 2008): senators with more daughters are more likely to support reproductive rights and women's safety

There are several ways for the government to initially allocate pollution permits in a cap-and-trade regulatory system. Please describe two of the ways discussed in class and a potential problem for each of the methods you chose.

1.Give permits to firms with a higher abatement costs: This has the drawback of rewarding the dirtiest firms and continuing to allow them to pollute. 2.Give permits to the newest firms in the industry: These firms tend to be the cleanest and need the permits the least. 3.Allocate permits through auctions: Economists like the efficiency of giving permits to firms you want to pay the most for them, but this would allow the richest firms to buy up all of the permits and use them to keep their competition out by withholding them or marking them up.

The state of West Virginia has seen an 8% increase in unemployment when it raised minimum wage by 10% during an economic recession, while the neighboring state of Ohio, which did not change minimum wage saw a 5% increase in unemployment over the same time period. Calculate a difference-in-difference estimator to isolate the effect the minimum wage change might have had on the unemployment rate and interpret this result.

8% - 5% = 3% the 10% increase of minimum wage may have accounted for a 3% increase in unemployment since Ohio in this case would be the control group with no change in economic conditions

When it comes to allowing the government to use discretionary fiscal policy as a stabilization tool, what incentives do politicians tend to face and respond to? Which of the two major political parties (democrats and republicans) fall prey to these incentives?

Allowing the government to employ discretionary fiscal policy encourages government officials to overuse expansionary fiscal policy since it is politically popular to increase government spending and cut taxes. This leads to budget deficits and the accumulation of a lot of debt. Both political parties fall prey to these incentives

Briefly describe what is meant by a negative internality? Describe one reasons why there still might be a role for government to reduce smoking behavior even if there is no external effect.

A negative internality is the damage done to oneself through adverse behavior that is not fully accounted for when making the decision to engage in the adverse behavior. Some reasons for why we know some smokers might need help, which leaves a role for government: More than 75% of adult smokers begin smoking before their nineteenth birthday, meaning they make the decision to smoke as children and then become addicted adults who can't stop. There might be a role for government in preventing children from making these bad decisions. We know many adults who smoke would like to quit but are unable to do so because they suffer from a self-control problem: An inability to carry out optimal strategies for consumption. We know this from the prevalence of commitment devices designed to help individuals who are aware of their self-control problems fight their bad tendencies.

Describe the difference between a pooling and separating equilibrium and state which one will bring the insurance market close to the social optimum.

A pooling equilibrium is a market equilibrium in which all types of people buy full insurance, even though it is not fairly-priced to all individuals, where as a separating equilibrium is a market equilibrium in which different types of people buy different kinds of insurance products designed to reveal their true types. Since the social optimum is for everyone to have full insurance, a pooling equilibrium is one that can reach a social optimum.

In chapter 7, we discussed public goods. What are the two key characteristics of a pure public good and what problem does it cause for the market? Briefly describe one obstacle to the government of providing the socially efficient quantity of the public good.

A public good is both Non-rival in consumption (making the good available to one consumer does not reduce its availability to others) and Non-excludable (it is impossible, or incredibly costly, to exclude nonpaying customers from receiving the good), which means the market will tend to underprovide it due to the presence of free-riding (people trying to benefit from the good without paying for it). It is difficult for the government to provide the socially optimal quantity of the public good because (choose 1 of these): Government provision of the public good can crowd out private provision of the public good It is difficult to measure the costs and benefits of providing public goods It is difficult to measure preferences for public goods (people might not honestly reveal their preferences, know what their preferences are, and the government might have trouble aggregating them)

Describe one advantage and one disadvantage that we discussed in class of moving social security to a privatized system.

Advantage: - a system funded by individual savings increases capital stock - a system controlled by individuals and not the gov would not allow the gov to spend or borrow against it - respect individual decision making with regard to investment decisions (which will likely have a higher rate of return) disadvantage - this won't support the existing generation of retirees (still need to pay off the legacy debt) - a privatized system would have higher administrative costs - people maker their own investment decisions and can we trust them tot do that? (paternalism argument)

Describe in your own words the difference between an ex-post and ex-ante balanced budget requirement, and identify which one is most effective at constraining the government's budget and describe why.

An ex-post balanced budget requirement forces a government to have its budget balanced by the end of the fiscal year, whereas an ex-ante balanced budget requirement forces government officials to submit and/or pass a balanced budget at the start of the fiscal year. Ex-post balanced budget requirements are more effective at constraining government deficits because ex-ante balanced budget requirements only require a plan for balancing the budget rather than an outcome, and many plans are overly optimistic or don't hold up to market realities.

Estrogen Replacement Therapy (ERT) is often used to treat women suffering from negative side effects related to menopause. Due to concerns that ERT might increase the risk of heart disease, a series of students compared women who did and did not receive ERT after menopause and found that, if anything, ERT might actually lower the risk of heart disease. What potential bias existed within these studies and what research was done to yield a more accurate result?

Bias: those who received the treatment were more likely to be under a doctors care, have a healthier lifestyle and higher incomes (all of which associated with lower heart disease) everyone tested on it are healthier individuals Healy's study, a randomized trial, that looked at over 16,000 women across different clinical centers found that women who took ERT were more prone to heart disease, stokes and breast cancers

We talked about several types of impure public goods in class including a common pool resource and a club good. Describe the difference between a common pool resource and a club good, and give an example of each.

Common pool resource is non-excludable but rival. This means that anyone has access to it but there is not always enough for everyone, like crowded roads club goods are excludable and non-rival. This means only certain people can have it but the quality of it does not diminish from multiple people using it. This is exemplified with netflix subscriptions -- people have to pay but using it doesn't hinder anyone else's quality of shows

Briefly describe two strategies for reducing the moral hazard that might occur when trying to transfer money from one group of people to another.

Describe several ways to reduce moral hazard associated with transfer payments:1. Moving to categorical transfer payments: Transfer to targeted demographics using a target mechanism that: Is unchangeable (or incredibly costly to change) and targets those with a low earning capacity2. Using in-Kind Benefits and subject recipients to Ordeal Mechanisms: Features of transfer programs that make them unattractive, leading to the self-selection of only the most needy recipients3. Increase the attractiveness of outside options (employment and self earnings) such as providing job training, subsidizing childcare and pre-school, and labor market subsidies (Earned Income Tax Credit).

We discussed the Coporate Average Fuel Efficiency (CAFE) Standards regulation in class. Based on our class discussion, what was the direct or intended effect of the policy? What was the indirect or unintended effect of the policy?

Direct effect: Cleaner cars -- the CAFE standards regulated the fuel efficiency and carbon footprint of cars to make them cleaner for the environment indirect effect: cars were made smaller and lighter, which equated to a larger number of traffic fatalities (there were more highway deaths) and it made driving cheaper which increased the number of people on the roads and congestions (smaller reduction in gasoline consumption than intended)

Describe two reasons discussed in class why consuming alcohol has the potential for a much larger negative external effect than smoking cigarettes which leaves a larger role for government.

Drinking alcohol has larger external effects than smoking in the form of: Impaired driving: which kills almost 30 people per day in car crashes. Increased tendency towards violence: Alcohol is estimated to be involved in 55% of violent crimes.

Briefly describe the difference between entitlement spending and discretionary spending, and briefly describe one attempt to control the budget that we discussed in class.

Entitlement spending refers to mandatory funds for programs for which funding levels are automatically set by the number of eligible recipients and not by the discretion of congress. Discretionary spending is optional spending set by annual appropriate levels determined by congress and gets divided over twelve subcommittees. You could have talked about any of the following attempts to control the budget: The Balanced Budget and Emergency Control Act: It Initiated automatic spending cuts once the budget deficit started missing specified targets. However, the cuts were avoided by gimmicks, such as changing the targets Budget Enforcement Act: Rather than trying to target a deficit level, the BEA aimed to restrain government growth by creating the pay-as-you-go process (PAYGO), which prohibited any policy from increasing the estimateddeficit in the next six-year period (if you were going to propose a program, you had to raise the money to pay for it now, rather than borrow it) Debt Ceilings / Budget Control Act of 2011: Debt Ceilings were a traditionally obscure provision that limited how much the federal government could borrow, and was raised when necessary with little fanfare, but can be used to limit spending

First-Dollar coverage will cover all medical expenses while catastrophic coverage will have patients pay a deductible before their insurance kicks in, but their insurance covers all major medical expenses. What are two reasons that first dollar coverage does not smooth consumption as much as catastrophic coverage.

First Dollar Coverage does not improve consumption smoothing that much relative to catastrophic coverage because For risks that involve very small income losses ($100 for a physician's visit), the loss from reducing consumption by a dollar are roughly equal to gains from increasing consumption by a dollar People are able to self-insure spending when it is small and predictable (like a $100 doctor's visit) but not when expenses are large and unpredictable ($200,000 cancer diagnosis).

In chapter 13 we discussed how the social security system in the United States is an unfunded system that is not sustainable under the current rules since the benefits paid out exceed the tax revenue being brought in to fund the system. Briefly describe one potential way to cut benefits and one potential way to increase tax revenue that we discussed in class.

For benefits cuts, you could pick any one of the following: Reduce the annual increase in benefits from the CPI increase to the CPI increase minus 1 percent (which will have a greater negative effect on those who live longer) Lower the rate at which taxes paid are translated into benefits Reduce the benefits for higher income groups by raising the taxes collected on benefits for high income earners. For tax revenue increases, you could pick any one of the following: The government could increase tax revenue by raising the tax rates (a 4.7% payroll tax increase would fully fund the system) or by increasing the tax base. The tax base could be increased by easing immigration restrictions for younger workers or increasing the maximum income for which the current payroll taxes apply.

Briefly describe the process of gerrymandering. Describe how it is measured and identify an example of it occurring in today's political landscape.

Gerrymandering is the process of manipulating maps by theparty in power to maintain or grow their power, and an efficiency gap is used to measure it. The efficiency gap is calculated as Party A's wasted votes minus Party B's wasted votes divided by all of the votes cast in the election In 2021, North Carolina shifted its voting districts in a way that increased this efficiency gap by 11.6 points in favor of the Republicans, resulting in them claiming more voting districts.

Using the evidence from class, describe which solution has been more effective at preserving and increasing elephant populations around the world and why: Solution 1: Outlaw the killing of elephants and ban the ivory trade Solution 2: Give nearby villagers private property rights over the elephants and allow them to sell hunting licenses

Giving villagers private property rights over the elephants have increased their populations since former poachers who now share in the benefit of owning these elephants work to protect them and make sure their numbers increase. Banning the ivory trade pushes ivory into the black market, which causes the price to increase and incentivizes increased efforts at poaching elephants.

Distinguish between how we think voters, politicians, and bureaucrats should behave in an ideal democratic environment versus how they actually behave in the real world.

Ideal world: voter vote for politicians who want to carry out the policies they like, politicians work in the interest of the public enacting policies in the best interest of everyone, an bureaucrats would would help carry out these policies efficiently real world: voters only vote if the benefits of casting an informed vote outweigh the costs (many might think their vote won't have an impact), politicians will act in a way that will ensure their election and get people to like them. bureaucrats might push policies that are not in the best interest of the general public through lobbying

What has happened to the size of government as defined as government spending as a share of Gross Domestic Product (GDP) in the United States. What economic law is consistent with this trend?

In 1930, the federal government's activity accounted for only about 3.4% of GDP. From the 1950s through the present, the size of government has averaged around 20% of GDP, although it grows during recessions. This is known as Wagner's Law: The share of government expenditure as a percentage of GDP increases as the economy gets bigger.

The nominal interest rate is 6% and the inflation rate is expected to be 2%. However, in recent years, the inflation rate unexpectedly rose to 4%. What is the real interest rate at this 4% inflation rate? Please describe what this does to the burden of the national debt and why?

In this scenario, the real interest rate is 2% (2 = 6 - 4) since the real interest rate is the nominal interest rate minus the inflation rate. When inflation is higher than expected, the real interest rate is lower than expected and this is good for borrowers and lowers the burden of the national debt since we are paying this debt back with dollars that are worth less than we originally thought they would be worth when we borrowed them.

There has been considerable debates among economists as to whether or not smoking exerts a negative external cost on others, which would qualify it as a negative externality and leave a role for government to overcome the market failure created by cigarette use. Please describe two effects of smoking that could be considered a negative external effect and, for each one, a reason it might not be considered a negative external effect.

Increased Healthcare Costs: If health care companies raise premiums for smokers only, then this does not count as an externality as the cost is only felt by the smoker (Indeed, the Affordable Care Act allows health insurance to distinguish whether someone is a smoker or not). However, if the higher cost of caring for smokers is spread to others, then this does count as a negative externality (this can be the case with group coverage, being insured through the government, universal healthcare, or people who are uninsured and don't end up paying the cost of their medical care). Less Productive Workers: It has been estimated that smokers impose $600 - $1100 per year in lost productivity and absenteeism costs on business as they miss 50% more days due to illness. Does this count as an externality? If they receive lower wages due to the lost productivity, then no, but if the employers pay everyone less due to productivity lost, then yes Fires: Smokers are more likely to accidentally start fires then non-smokers. If they only burn their own property and don't require help from the fire department, and their insurance premiums are adjusted to reflect this higher risk, then this is not an externality. However, if they burn the property of others, raise the costs to fire departments, and raise insurance premiums for everyone, then yes, it is a negative external effect. Secondhand Smoke: If smokers are smoking around others then it counts as an externality, but if they are smoking by themselves (or around their family and have internalized the cost to their families), then there is no external effect.

what are the different government alternative to private health insurance?

Medicare: federal program providing health insurance for all people over the age of 65 and people with disabilities under the age of 65 and financed by a payroll tax of 1.45% each on employees and employers with no income limit Medicaid: federal and state program that provides health for low-income families, older adults, and people with disabilities

Describe the main differences between the Keynesian and Classical economic philosophies when it comes to the economy trying to rebound from an economic downturn. How would a classical economist suggest the government deal with an economic downturn and how would a Keynesian economist recommend the government deal with an economic downturn.

Keynesian economists believe that prices and wages are sticky and will not go down during a recession. Therefore, the economy will never rebound from that recession on its own (or at least not quickly). Therefore, the government needs to use expansionary fiscal policy to stimulate the economy back to full employment. Classical economists believe that prices and wages will drop during recessions causing firms to hire more workers and people to buy more stuff, causing the economy to correct itself without any government intervention. A classical economist would recommend the government let the economy rebound on its own and focus on balancing the budget.

In chapter 4, we discussed the difference between Classical and Keynesian fiscal policy. Describe the main differences between the Keynesian and Classical economic philosophies when it comes to using discretionary fiscal policy to pull the economy out of a recession. When it comes to allowing the government to use discretionary fiscal policy as a stabilization tool, what incentives do politicians tend to face and respond to, and how has it manifested itself today.

Keynesian economists believe that prices and wages are sticky and will not go down during a recession. Therefore, the economy will never rebound from that recession on its own (or at least not quickly). Therefore, the government needs to use expansionary fiscal policy to stimulate the economy back to full employment. Classical economists believe that prices and wages will drop during recessions causing firms to hire more workers and people to buy more stuff, causing the economy to correct itself without any government intervention. A classical economist would recommend the government let the economy rebound on its own and focus on balancing the budget. Allowing the government to employ discretionary fiscal policy encourages government officials to overuse expansionary fiscal policy since it is politically popular to increase government spending and cut taxes. This leads to budget deficits and the accumulation of a lot of debt which is what we see today

Define what is meant by legacy debt in your own words and give an example of legacy debt as it relates to our current social security system in the United States.

Legacy debt is a consequence from an unfunded system and it is the idea that the first people to collect social security did not pay much into the system, but received much more in benefits. If the social security system were to end, this debt would be paid by the last generation that paid into the system, but did not receive benefits (this is essentially a transfer from the last generation to the first generation). An example of legacy debt is the first group of individuals who started collecting social security in 1940 only having paid into it since 1937, including Ida May Fuller, the very first beneficiary of social security. She worked for only 3 years after the establishment of social security and paid a total of $24.75 in social security taxes. She collected her first social security check of $22.54 at the age of 65 in 1940, and lived to 100 collecting a total of $22,888.92 in benefits.

Suppose there are two individuals in the market, Moana and Maui, both of whom enjoy a good outdoor fireworks show. The Marginal Benefit of an outdoor fireworks show to Moana is 400 - 2Q while the Marginal Benefit of an outdoor fireworks show to Maui is 100 - 3Q. The marginal cost of an outdoor fireworks show is 300. Using the idea of Lindahl Pricing, what is the optimal number of outdoor fireworks show and what is at least two knowledge problems the government has in achieving this optimal number.

Lindahl pricing -- 400 -2Q) + (100 - 3Q 500 - 5Q = MBN 300 = 500 - 5Q Q = 40 two knowledge problems (1) preference revelation problem: individuals have an incentive to lie about this willingness to pay in an effort to free-ride off the payments of others (2) preference knowledge problem: even if individuals are honest, they may have no idea how to value the public good (3) preference aggregation problem: even if individuals are honest and knowledgeable, you still have to aggregate each individual value into a social value

Briefly describe Arrow's impossibility theorem and describe how preferences must be restricted in order for there to be a consistent outcome.

Majority voting does not yield consistent outcomes when preferences are double-peaked. Arrow's impossibility theorem suggests that majority voting will only yield a consistent outcome when either preferences are restricted to single peaked, or we are under a dictatorship. Arrow's theorem says that there is no social decision (voting) rule that converts individual preferences into a consistent aggregate decision without either: 1) Restricting preferences or 2) Imposing a dictatorship. That said, to yield a consistent outcome, preferences have to be restricted to be single-peaked, otherwise it will result in cycling.

Briefly describe the concept of moral hazard in your own words and describe an example of moral hazard resulting from a government policy.

Moral hazard occurs when people become more likely to engage in an activity that leads to an adverse effect as result of being protected from that adverse effect. We talked about several examples in class, including how subsidizing flood insurance encourages people to build in flood prone areas, or how large unemployment benefits might reduce people's desire to find new employment.

In chapter 4, we talked about externalities. Briefly describe the definition of a negative externality and the problem it causes for the market in terms of market failure. What is one government solution that can be employed to overcome this market failure?

Negative externalities is when the actions of one party (or multiple parties in a transaction) have a negative effect on a non-consenting 3rd party. When this occurs, the market tends to produce too much of this activity since private actors are not considering the social cost they are creating. A potential government solution is bring the market production back in line with the social optimum could be to: Institute a Pigouvian tax in the amount of the negative external harm being created Regulate the activity producing the negative externality

Describe how redistribution from the wealthy to the poor can improve social welfare and the economic reason for why the government should be involved in this redistribution

Redistributing from high income individuals (for whom the marginal utility of losing a dollar is low) to low income individuals (for whom the marginal utility of gaining a dollar is high) can increase social welfare. If the consumption of low-income individuals can be viewed as a public good then the market (and private charities) will underprovide this redistribution since we can enjoy seeing less affluent consume more without contributing ourselves. So, there may be a role for government to tax people and provide the optimal amount of redistribution.

in Chapter 15, we discussed the moral hazard faced by health care providers. Describe, in your own words, the difference between retrospective reimbursement and prospective reimbursement and the incentives created by each type of reimbursement.

Retrospective Reimbursement: reimbursing physicians for the cost they have already incurred results in the overuse of medical care and provider-side moral hazard too much medical care occurs prospective reimbursement: practice of paying providers based on what treating patients should cost, not one what the provider spends (paying the average cost of the procedure) results in underuse of and insufficient medical care (they will not use medical care in order to cut costs)

Describe, in your own words, the difference between retrospective reimbursement and prospective reimbursement and the incentives created by each type of reimbursement.

Retrospective reimbursement reimburses physicians for the costs they have already incurred, while prospective reimbursement pays providers based on what treating patients should cost, not what the provider actually spends. Retrospective reimbursement removes any incentive for providers to treat their patients cost effectively (incentive to overprescribe) while prospective reimbursement allows the physician to make more money by delivering less care since they get a certain amount from the insurance company regardless of the amount of care provided (incentive to under-prescribe)

Briefly describe two ways in which the Affordable Care Act (ACA) reduced barriers to getting non-group coverage. Briefly describe one negative consequence from the ACA regulations.

The ACA reduced barriers to the non-group insurance market by (1) Banning pre-existing condition exclusions. (2) Disallowing higher charges for less healthy enrollees. (3) Created an individual mandate and provided tax credits to subsidize the cost of insurance. negative consequence: (1) It has resulted in 20 million more people to be able to gain health insurance, but has also resulted in premiums increasing by 60% on average

Briefly describe the Coase theorem in your own words. According to the Coase Theorem, if one paper company was polluting a lake being used by one fishing company, and it was only that fishing company who was experiencing the negative impact of that polluted lake, would we need the government to help society reach the optimal outcome? Defend your answer.

The Coase theorem states that as long there are well-defined private property rights and it is easy for people to get together and negotiate in a situation involving an externality, then they can negotiate to an efficient solution regardless of who owns the property rights. In this situation, there is only one firm exerting negative externalities on one other firm, there should be low transaction costs and a likely possibility of reaching an efficient outcome without government intervention. The only thing the government has to do is enforce the agreement if there is a contract dispute. Having said that, if you can adequately defend one of the four reasons that Coase bargaining might break down, leaving room for public solutions, then you can also get credit for that.

Describe the main idea behind the rational ignorance effect by discussing both the marginal cost of voting as well as the marginal benefit of voting. What implications does this rational ignorance effect have on the idea of organizing a government as a democracy versus a republic?

The Rational Ignorance Effect is the idea that people will rationally choose to become ignorant of policy issues because the marginal cost of obtaining that information outweighs the marginal benefits. The Marginal Benefit of Voting = (probability that you are the deciding voter) x (how much you care your preferred candidate wins), which is close to zero since you have little chance of being the deciding voter that overturns an election result. The Marginal Cost of Voting = The time, effort, and resources needed to inform yourself, register to vote, and actually vote. Since individuals might choose to be ignorant of public policy, it might be more effective if we organize as a republic where we elect representatives to pursue that information for us (of course, this is also problematic due to gerrymandering and government failures).

There were 3 potential timing problems with using discretionary fiscal policy as a stabilization tool. Name and describe these three timing problems identified in class, and discuss the problem that can occur if this policy is not timed correctly.

The Recognition Lag: Our ability to forecast is extremely limited The Administrative Lag: Change in fiscal policy requires legislative action, which takes a long time The Impact Lag: A change in fiscal policy will not have an immediate impact on the economy If this discretionary fiscal policy is not timed correctly, then it could increase rather than reduce instability.

Briefly describe the 1992 California study used to determine the effect of reducing benefits on employment levels. What kind of research did the researchers perform and what results did it yield?

The TANF benefit guarantees -- randomized trial experiment tested to see if reducing the benefit levels increased employment rates randomly assigned 1/3 of the families to keep getting the original benefit level, while the other 2/3 families received a 15% reduction from the regional maximum benefit level those who received a reduction in benefits has an employment level of 49% compared to 44.5% for the control group

Briefly describe in your own words the free-rider problem associated with public goods and give an example of this free-rider problem in the real world.

The free rider problem occurs whenever an investment has a personal cost but a common benefit. People will tend to underrepresent how much of the public good they want to avoid paying for it and then continue to use the amount provided by others. Some examples we mentioned in class include: Until 2013, fire services in Victoria, Australia, were financed by a tax on fire insurance policies. Individuals who did not get insurance still received services. In 2013, Victoria moved to financing fire services through property taxes in order to address this issue. The Metropolitan Museum of Art in New York had a "recommended" donation instead of an admission fee, but only 17% paid the full charge. To address this, the Met has started charging admission to out-of-town visitors.

The social security system has been described as unsustainable in that the accumulation of benefits it pays out to current retirees is greater than the accumulation of payroll taxes collected from current workers to fund the system. To fix this, either fewer benefits should be paid out or more taxes should be collected. Describe two ways we discussed in class to increase the amount of taxes collected to keep funding the system.

The government could increase tax revenue by raising the tax rates (a 4.7% payroll tax increase would fully fund the system) or by increasing the tax base. The tax base could be increased by easing immigration restrictions for younger workers or increasing the maximum income for which the current payroll taxes apply. tax more affluent elderly who receive the benefits

In chapter 12, we talked about insurance markets and the concept of moral hazard. Briefly discuss the economic reason why people want insurance. Briefly define moral hazard that can result from having insurance and describe an example of moral hazard resulting from a government policy.

The law of diminishing marginal utility suggests that people prefer to smooth consumption because gains in utility from raising consumption (say from 40,000 to 70,000) are smaller than losses in utility from lowering consumption (say from 40,000 to 10,000). This is the main reason why people will want to buy insurance. They will smooth their consumption by sacrificing some consumption now by paying the premium to avoid having to sacrifice a lot of consumption later in the case of an unfortunate event. Moral hazard occurs when people become more likely to engage in an activity that leads to an adverse effect as result of being protected from that adverse effect. We talked about several examples in class, including how subsidizing flood insurance encourages people to build in flood prone areas, or how large unemployment benefits might reduce people's desire to find new employment.

Briefly describe how the poverty line is calculated and at least one drawback to this calculation that makes it a less accurate measure of poverty.

The poverty line is calculated as the cost of a minimally acceptable diet meeting minimum nutritional standards using average national food costs for families of a certain size multiplied by 3 since at the time this measure was created, households spent an average of 1/3 of their income on food. Problems with this measure include: 1. The bundle has changed: The share of food in family consumption has fallen over time relative to shelter, medical care, and other goods. By 2019, the typical family only spends 13% of its budget on food. 2. Cost of living differences are ignored: The same amount of money goes a lot further in some areas than others 3. How income is defined: there are some issues with how income is defined when setting the poverty line (it should include transfers, take into count cost of living differences, and focus on after tax income.

According to the data in chapter 1, what are the top two biggest budget items for the Federal Government as of 2019? Within the context of overcoming market failure, why is there a role for government in providing these budget items.

The top two budget items for the Federal Government are health and social security. The role for government in providing these items are overcoming the market failure of asymmetric information and adverse selection. In the health insurance industry and the annuities market, there will be a less than socially optimal amount of coverage provided due to potential adverse selection of only sick people signing up for health insurance and only those believing they will live a long time purchasing annuities to smooth their consumption.

Briefly describe two factors that make it more likely that government provision of the public good will only partially versus fully crowd out private provision of the public good.

The two factors that reduce crowding out from full crowing out to partial crowding out are: Non-contributors to the public good are taxed to finance provision of the public good. When individuals derive utility from their own contributions as well as the total amount of the public good (Warm-Glow Effect)

In the public goods laboratory experiments, do people try to completely free-ride off of the contributions of others or do they contribute to the public good? What are two potential problems with these laboratory results in terms of why they might not represent how people behave in the real world?

These public good experiments result in 30% to 70% contribution rates. Over multiple rounds, it often declines, but rarely if ever reaches zero. These contribution rates are much higher than what an economist would expect from a rationally self-interested individual. Two potential problems with these laboratory results are: Individuals may behave differently in a laboratory environment where they know they are being observed and the stakes are low Most laboratory subjects are college undergraduates which may not represent the general population

Climate change has been a politically divisive topic where the different sides of the political spectrum have different beliefs regarding how much human activity has driven the recent increase in temperatures, and so they have different opinions regarding how much they pursue policies that reduce carbon emissions. Present a piece of evidence from class that supports a push towards more emission reduction and a piece of evidence from class the supports those who oppose such policies.

Those who support emission reduction policies can point to: The 2010 Anderegg study found that 97% of climate researchers publishing most actively in their field agree that human activity is primarily responsible for global climate change. The 2013 Cook review of 11,944 peer-reviewed studies on climate change found that only 78 studies (0.7%) explicitly rejected the position that humans are responsible for global warming. The fact that temperatures have increased around 2 degrees during a time where greenhouse gas emissions have been most prevalent. Those who oppose such policies can point to: In 2010, Climate Depot released a report featuring more than 1,000 scientists who disagreed that humans are primarily responsible for global climate change. The same 2013 Cook Review on 11,944 studies found that only 3,974 studies express a view on the issue, of those only 64 (1.6%) said humans are the main cause. The fact that climate change has occurred throughout the planet's history regardless of the activity of human beings

Briefly describe in words how to calculate total abatement costs from a graph containing a marginal abatement cost curve. Give an example of a better pollution abating technology and state how this would affect both this curve and the total abatement cost calculated from this graph?

Total abatement costs can be calculated as the area under the marginal abatement cost curve at a determined number of emissions. More efficient solar panels is an example of an improved technology that would shift this curve down and reduce total abatement costs. ex. better filtration system for waste water

Briefly describe in words how to calculate total damage cost from a graph containing a marginal damage cost curve. Describe one potential change that can cause the marginal damage cost curve to shift up leading to higher total damage costs?

Total damage costs can be calculated as the area under the marginal damage cost curve at a determined number of emissions. Things that can shift the marginal damage cost curve upward and increase total damage costs include: 1.Differences in Population exposed: The more people and the more sensitive populations that are exposed, the higher the damage 2.Different time periods and/or meteorological activity: Winds can blow emissions into certain areas which will increase the damage of the emissions to that area. 3.New scientific estimates of increased pollution impact: new ways of analyzing the effect of the emission including considering its global, rather than just local, impact could affect the way this damage is measured.

Describe two reasons why there might be a role for government in providing health insurance, even in a world without asymmetric information and adverse selection.

Uninsured people are less likely to receive vaccinations and care for communicable diseases, making it more likely that these diseases will be spread to others When uninsured get served by medical providers and don't pay their bills, these costs ($50 billion in 2013, but fell by 21% as a result of the ACA) get passed to other users of the medical system in the form of higher prices Inappropriate delivery of care: The uninsured tend to use the emergency room instead of a physician's visit for an illness such as the common cold and the emergency room is an expensive place to treat a minor illness. This further raises the cost of uncompensated care. Paternalism: The government thinks that people can't make good decisions for themselves about how much health insurance to obtain Equity: Some feel that health care is a basic right, like food and shelter, because the uninsured are generally less wealthy than average, they might be a group we want to redistribute health care too. Job Lock: Concern about becoming uninsured on the part of millions of individuals who currently have insurance keeps them form searching or switching to better jobs where they may be more productive. This reluctance to change can lead to a mismatch between workers and jobs that can lower overall U.S. productivity. Job lock reduces mobility across jobs by as much as 25%.

In chapter 9, we discussed the problems of using majority voting as way to aggregate preferences in a two-party system. Briefly describe the incentives faced by voters' when it comes to the act of actually voting, and briefly describe the incentives faced by politicians in a two-party system to try and maximize their votes.

Voters will often rationally choose to abstain from voting or be ignorant of the political climate because the Marginal Cost of Voting (The time, effort, and resources needed to inform yourself, register to vote, and actually vote) is often greater than the Marginal Benefit of Voting (probability that you are the deciding voter x how much you care your preferred candidate wins).\ In a two party system, the politicians have the incentive to appeal to the median voter in an effort to win the election, even if the median voter's preferences do not reflect the majority of preferences.

Briefly describe what is meant by market failure and describe one source of market failure that we discussed in class.

Whenever the market does not yield the optimum result (the optimum price and quantity that maximizes total welfare and economic efficiency), economists describe it as market failure. There are four types of market failure: Externalities: Externalities are when your actions or a transaction has an external effect on a non-consenting third party. There are two types: A) Negative externalities: When your action or transaction makes a non-consenting third party member worse off. The market tends to produce too many of these activities or transactions B) Positive externalities: When your action or transaction makes a non-consenting third party better off. The market tends to produce too few of these actions, transactions. Public goods: goods that have two key characteristics (non-rival in consumption and non-excudable) which make it difficult for the market to provide these goods Lack of Information: Economic theory assumes that both parties to the exchange have enough information to determine that the benefits of the exchange outweigh the cost of that exchange, so that the exchange is mutually beneficial. As long as this is the case, all voluntary exchanges are good and create value. However, sometimes, people don't have the information to determine what exchanges are beneficial. Lack of Competition: In order for markets to be efficient, they have to be competitive. This means it can't be dominated by a single producer (except in cases where there is a natural monopoly)

Differentiate between a funded versus unfunded system

a funded system is when current savings are invested in various assets in order to pay future benefits to the current savers, where as an unfunded system is when payment collected from today's workers go directly to today's retirees, instead of being invested to pay future benefits for the current workers. Our current social securitysystem is one that is partially funded as the Greenspan Commission established a social securitytrust fund to try to move the system away from an unfunded one in 1983, but this trust fund isprojected to run out in 2035, so it will return to being a completely unfunded system by then

Give an example of a pure public good and describe how this example meets the two characteristics of the public good.

a pure public good is non excludable and non rival -- ex is a lighthouse it can be seen by anyone and (everyone can receive the good) and making the good available to one person does not reduce its availability to another also fireworks, traffic lights

Briefly describe how an automatic stabilizer works using an example of an automatic stabilizer that we talked about in class. What advantage do these automatic stabilizers have over attempting to use discretionary fiscal policy to stabilize the economy?

automatic stabilizer is a built in feature that automatically increases budget deficits during economic contractions and reduces budget deficits during economic expansion (without a change in policy) examples: unemployment compensation automatic stabilizers are already built in mechanisms that increase/decrease budget deficits during economic contractions/expansion. in the example of unemployment compensation, in a recession when unemployment rates rise above the non cyclical rate of unemployment, taxes will automatically decrease while gov spending increases to go towards programs like unemployment insurance benefits, medicaid, and SNAP. the same goes for an expansion, where taxes will increase and expenditures decrease for these programs. these have an advantage of stabilizing the enemy without additional government action or policy.

Briefly describe the difference between cash and capital accounting, and describe at least two problems with attempting to use capital accounting.

cash accounting measures the Govs fiscal position as the difference between current spending and current revenues capital accounting measures the gos fiscal position that accounts for the changes in the value of the governments net asset holdings problems: (1) hard to distinguish gov consumption from gov investment (education is it consumption or investment?) (2) some of these assets can be difficult to value: how do you value education spending (3) its easier for politicians to misstate the government's budgetary position: this flexibility makes it easier for politicians to play games wit the budget

Briefly describe the difference between an expansion and a contraction using the two variables that define where we are in the business cycle. Identify when a contraction is officially called a recession.

expansion is when unemployment declines and real GDP increases contraction is unemployment increase with real GDP decline when two or more consecutive quarters GDP has declined it becomes a recession (6 months)

Describe one major drawback of the health care system in the United States and support it with a piece of empirical evidence from class. Describe one advantage of the health care system in the United States and support it with a piece of empirical evidence from class.

for drawbacks, you could have listed any one of the following: 1. The United States has higher health care spending than all other OECD countries. It spends nearly 18% of GDP on healthcare compared 12% by Switzerland, the second highest country. 2. The United States has the highest infant death rate, potentially preventable death rate, and number of people going without health care than other comparable countries 3. The United States has the highest prices for drugs and services compared to the average country. These prices are significantly higher than the lowest cost country. For Advantages, you could mention that 1. The U.S. health care system leads in innovation, producing more innovations than all of the European Union and having a larger impact on research and development than the next 10 highest countries combined.

Describe one major shift in state and local government spending from the 1960's to more recent times. Describe one major shift in state and local revenues over this same time period.

larger percentage of spending at the state and local level has been geared towards health with a lower share of spending on transportation and other social services over this time period revenue from property taxes have dropped, but revenues from income taxes and federal grant-in-aid has risen

explain why many people choose not to cast an informed vote using the rational ignorance effect

marginal cost = time spent voting marginal benefit = likelihood your candidate wins the costs fro many outweigh the benefits of voting so they are ignorant on policy choices

Is education in the form of public school a pure public good according to the definition that we used in class? Defend your answer. Regardless of your answer, is there a role for the government to provide citizens with education? Why or why not?

public schools are not a pure public good because it is excludable due to students having to enroll (and expulsion/suspension) and meet certain requirements to attend and it is rivalrous to an extent because classroom space is limited and teacher attention is limited -- adding more students can reduce the quality of education for others but gov is still obligated to provide education because it has strong positive externalities -- helps economic growth, reduce crime, investment in human capital

Briefly describe the median voter theorem and the process by which a politician would go from representing an extreme preference to representing that of the median voter.

says that majority voting will yield the outcome preferred by the median voter if preferences are single peaked a politician who initially represents an extreme view of a policy issue will soon realize that their political opponent will gain more votes since everyone who is less extreme will vote for the opponent. the only way to win is to get less and less extreme until you are representing the preferences of the median voter.

Briefly describe how social security wealth is calculated and describe two groups that will have a higher social security wealth along with the reasons why their social security wealth will be greater.

social security wealth is calculated by (the expected present discounted value of a persons future social security benefits) minus (the expected present discounted value of a person's payroll tax payments) (1) females have more SSW than males become on average they live longer (2)married couples have more SSW than single people (3) low income earners receive a higher benefit rate relative to the amount they pay in (4) black recipients have a lower life expectancy than whites, so their SSW is lower

When is time series analysis more effective at demonstrating a causal relationship, rather than just correlation? Provide an example to support your argument.

time series analysis is more effective at determining causality: when there is a slow-moving trend in one variable through time, there is possibility for confounding variables to influence the results since there is a lot of other changes during that time sharp breaks or changes in the movement of one variable in a narrow window of tie might provide more compelling evidence for causality examples: the youth smoking rate and cigarette prices, overtime real price of cigarettes have risen while youth smoking rates declined. could be confounding factors like more health information and research coming out or switch to alternatives like legalized marijuana but if you saw youth coming rates go up and down several times and cigarette prices always goes down when youth smoking rates go up, then there is more evidence for a causal relationship

compare costs and benefits of Universal Basic Income as a redistribution solution

universal basic income is a social welfare program where all citizens would receive a flat grant of income, without conditions benefits: 1. this is not means tested and would not count against or distort marginal work effort 2. all citizens would be ensured a minimal standard of living 3. will not lead to specific price increases since it does not subsidize a specific industry Costs: 1. it has the potential to reduce labor supply 2. it would be very expensive: is estimated to cost $1.6 trillion a year to give ever household $12,800 3. tradeoffs between targeted assistance and general assistance should be more thoroughly explored: gov might want to be more paternalistic than what universal basic income allows

Briefly describe how using budget deficits as part of expansionary fiscal policy to pull the economy out of a recession might crowd out private investment and capital accumulation.

using budget deficits raise interest rates which discourages private from from investments gov will increase spending and cut taxes , requiring the gov to borrow money from limited supply of savings available and drive up interests rates higher interest rates will cause private firms to be less likely to borrow money and invest in capital accumulation and they will put their money in savings to capture these higher interest rates = less consumption/spending