This Document Contains Chapters 17 to 18 Chapter 17: Public Goods and Common Resources What’s New in the Fifth Edition? • Updated business cases Chapter Objectives • Explain how to classify goods as either private, public, common, or artificially scarce. • Explain why private goods are the only type to be provided efficiently by the market. • Explain why public goods are undersupplied by the market. • Explain why common resources are overused. • Explain why artificially scarce goods are under consumed. • Explain how governments can intervene in the production and consumption of public goods and common resources in order to make society better off, and why finding the right level of government intervention can be difficult. Teaching Tips Private Goods—and Others Creating Student Interest • Conduct the following demonstration and then use it to prompt a discussion of private goods, public goods, and free-riding. Bring a small token to class for each student—for example, pieces of candy. (Don’t show them what you have, so that preferences for individual candies don’t influence student choices.) Tell the students that you have brought them some treats today. If they declare that they would like one of the treats, they will get one. However, you have also brought a treat for the whole class—bonus points! If 75% or more of the class decides they would not like a treat, then the whole class will get bonus points. Emphasize that everyone in the class will get the bonus points or no one will. It doesn’t matter what an individual chooses—either everyone in the class or no one in the class gets bonus points. Also, the treats go to those who have said they would like one, regardless of whether the class gets bonus points. You should select the treat, the percent of the class, and the number of bonus points to fit your particular class. You can also change the variables and rerun the demonstration for further illustration. In the post-demonstration discussion, be sure to bring out that the treat represents a private good (rival and excludable), that you have made the bonus points excludable, and that anyone who decided they would like a treat and received bonus points (or prevented the class from getting them) was a “free rider.” That is, those who got treats did not “pay” their treat to get the potential bonus points for everyone. Presenting the Material • Students may be unclear about the meaning of the term rival in consumption. Give a specific example of a student eating an apple. No one else can eat the apple at the same time. • The free-rider problem is another difficult concept for students. Explain that this problem exists for public goods. If a private producer cannot exclude those customers who do not pay for the good, then consumers have an incentive to free-ride while someone else pays for the service. • Students often point out apparent exceptions to the free-rider problem: donations to religious institutions, National Public Radio, PBS (ask about Sesame Street!), and charitable organizations. Point out that the free-rider problem assumes that people operate in their own self-interest. Not everyone whose children watch Sesame Street contributes to public television; most families free-ride on the generosity of others. Public Goods Creating Student Interest • Ask students if education is a public good. Is it nonrival? Is it nonexcludable? Is education provided by the market or by the government? Education provides an interesting discussion because the answer to each of the questions is “somewhat” or “it depends.” You can add additional students to a class, up to a point—but then consumption becomes rival. Universal education in the United States means that education is, in a way, nonexclusive. However, private schools can prevent consumption by those who do not pay. Even private schools receive public funding and public schools receive private contributions. This discussion can illustrate the concepts important to determining what constitutes a public good as well as showing that it isn’t always clear. • Tell students that the university is planning to plant more trees on campus. They are going to collect contributions from students and then decide how many trees to plant based on how much they collect. Ask each student to take out a piece of paper, or alternatively pass out small pieces of paper to each student, and have them record how much they are willing to donate. Tell them to pretend they will really have to pay so they should only write down a number that represents a true willingness to pay. Collect the papers and tally up the results. You are sure to get some zero votes. Ask students if they think this is fair that some people pay and some do not. Ask them if it would be better to have the university charge each student a flat fee as part of tuition to pay for the trees. This example highlights the free-rider problem. • Use Handout 17-1 to help students understand the optimal amount of a public good. • Use Handout 17-2 to help students discern if a good is a public good. Common Resources Creating Student Interest • Present the example of a highway as a common resource. Is it excludable? Is it rival? Ask the students to consider toll roads versus federal highways—are toll roads rival and excludable? What happens when highways become crowded? Is an overcrowded highway “free”? (There is an opportunity cost to traffic jams.) How would overcrowding be addressed for a toll road? (Raise the toll.) What about for a federal highway? (Build more?) Presenting the Material • Use the case of fishing discussed in the text chapter (see also Figure 17-3, shown next). A specific fishing area is nonexcludable but is rival in consumption: One person’s catch cannot be caught by another fisherman. • Explain that in an unregulated market, the actual use will exceed the efficient use of the resource. • Organize students into teams or just pair students. Tell them they are in charge of preserving forests in the United States. Ask them to come up with three strategies to help preserve this common resource. Ask the teams or pairs to report to the whole class. In the follow-up discussion, emphasize the three strategies from the text: tax the users of the resource, make the common resource excludable by assigning property rights to it, and make the rights to use the resource tradable. Artificially Scarce Goods Creating Student Interest • Tell your students that you are considering going out of town for a week later in the semester. You plan to tape your class presentations in advance and make them available for students to download while you are gone. Ask the students if the video is rival and excludable. (It is excludable, but not rival.) • Ask the students to list the costs of creating downloadable videos of your class presentations (your time, use of equipment, space on the Internet). After the downloadable video presentations have been created, what is the marginal cost to you of an additional student watching the video? (Zero.) What is a student’s marginal cost of watching the video? (Their opportunity cost. Point out that if they don’t watch the video, they will have to learn the material on their own, which may take longer!) What is the marginal benefit of an additional student watching the video? (Increased understanding of the material, better grades—make the case that it is somewhere greater than zero!) • Based on this information, what price should you charge for access to the video? The allocatively efficient price for the video is P = MC. Since MC = 0, it should be free! Any price above zero would create deadweight loss as fewer students watch the video when the price increases. Should students watch the videos? They should if MB > MC for them. Of course, in your discussion you have explained why this is very likely. At the end of your discussion, you may have decided to create the video or simply tell them you have decided you can’t bear to leave them for a week! Presenting the Material • Students may not understand why particular goods are “scarce.” Explain that because the good is excludable, producers will charge a positive price for it and allow only those who paid for it to consume it. • Students may be unclear as to the meaning of “artificially” scarce. Explain that the marginal cost to society of allowing one more sports fan to watch a game is zero. The game is being produced anyway, so no additional scarce resources will be used up if everyone watches the game. Producers make the game scarce because they can force viewers to pay for it. • Use on-demand TV as an example of an artificially scarce good. Explain that the marginal cost of allowing one more viewer to watch a show on TV is zero. An efficient price is equal to zero, so you would think that anyone could watch it. However, because TV networks can exclude nonpayers from watching, the good becomes artificially scarce. Common Student Pitfalls • MSC of a common resource. Students may be unclear as to the difference between the marginal social cost of using a common resource versus the marginal cost to the individual. Remind students that the market supply curve is the horizontal sum of the marginal cost curves for firms in an industry. The supply curve in this section reflects the marginal cost to each firm for producing the product. The marginal social cost includes the firm’s marginal cost plus the cost that each firm’s action imposes on others. For example, each additional fisherman imposes a cost on all others because his catch will result in fewer fish in the common pool for the others. • Marginal cost of exactly what? With goods that are nonrival in consumption, students often confuse the marginal cost of producing a unit of a good with the marginal cost of allowing a unit of the good to be consumed. For example, with cable TV, once the cable company produces and broadcasts the program (the marginal cost of production), there is no additional cost to allow an additional customer to watch it (the marginal cost of one more viewer is zero). Chapter Outline Opening Example: The Great Stink of 1858 in London illustrates the need for government to act when faced with problems associated with public goods and common resources. As a result, London developed a sewage system that benefited everyone. I. Private Goods—and Others A. Characteristics of goods 1. A good that is both excludable and rival in consumption is a private good. 2. Private goods can be efficiently provided by a market economy. 3. When a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it. 4. A good is nonrival in consumption if more than one person can consume the same unit of the good at the same time. 5. Fire protection is nonexcludable: Everyone is protected when fires are put out before they spread. TV programs are nonrival in consumption: My decision to watch a show does not prevent you from watching the same show. 6. We can classify four types of goods, as illustrated in text Figure 17-1, shown next. B. Why markets can supply only private goods efficiently 1. Markets cannot supply goods and services efficiently unless they are private goods—excludable and rival in consumption. 2. Goods that are nonexcludable suffer from the free-rider problem: Individuals have no incentive to pay for their own consumption and instead will take a “free ride” on anyone who does pay. 3. Because of the free-rider problem, even though consumers would benefit from increased production of the nonexcludable good, no one individual is willing to pay more for it, so no producer is willing to supply it. Therefore, nonexcludable goods suffer from inefficiently low production in a market economy. 4. Goods that are nonrival in consumption suffer from inefficiently low consumption in a market economy. 5. Private goods are the only goods that can be efficiently produced and consumed in a competitive market because: a. Producers have an incentive to produce private goods because they are excludable—producers can charge for them. b. Consumers have an incentive to pay a positive price—a price equal to the marginal cost of production—when a good is rival in consumption. 6. Although most goods are private goods and therefore provided efficiently in a market system, some crucial goods are nonexcludable and nonrival in consumption, so government must step in to provide them. II. Public Goods A. Providing public goods 1. A public good is both nonexcludable and nonrival in consumption. 2. Some examples of public goods are a sewage system, disease prevention, national defense, and scientific research. 3. Sometimes a nongovernmental solution is found for the free-rider problem—for example, voluntary contributions for scientific research. 4. When nongovernmental solutions fail or come up short, government must provide public goods. B. How much of a public good should be provided? 1. Sometimes, provision of a public good is an either-or decision. An example is a sewage system. 2. In most cases, government must decide whether to provide a public good and how much to provide. 3. In the special case of a public good, the marginal social benefit of a unit of the good is equal to the sum of the individual marginal benefits that are enjoyed by all consumers of that unit. 4. Because the marginal social benefit of one more unit of a public good is always greater than the individual marginal benefit to any one individual, no individual is willing to pay for the efficient quantity of the good. This is illustrated in text Figure 17-2, shown next. 5. The problem of providing public goods is similar to the problem of dealing with positive externalities: Market failure calls for government intervention. C. Cost-benefit analysis 1. Governments engage in cost-benefit analysis when they estimate the social costs and social benefits of providing a public good. 2. Estimating the cost of supplying a public good is straightforward. Estimating the benefits is a very difficult problem. 3. People have an incentive to overstate their desire for a public good. III. Common Resources A. The problem of overuse 1. A common resource is nonexcludable and rival in consumption. 2. Common resources left to the market suffer from overuse. 3. For a common resource, the marginal social cost of my use of that resource is higher than my individual marginal cost. 4. Many negative externalities (such as pollution) can be thought of as involving common resources (such as clean air). B. The efficient use and maintenance of a common resource 1. Because common resources pose problems similar to those created by negative externalities, the solutions are also similar. Society must get individual users of the resource to consider the costs they impose on other users. 2. There are three ways to induce people who use common resources to internalize the costs they impose on others. a. Tax or regulate the common resource. b. Create a system of tradable licenses for the right to use the common resource. c. Make the common resource excludable and assign property rights to some individuals. IV. Artificially Scarce Goods A. An artificially scarce good is excludable but nonrival in consumption. B. Because the marginal cost of an individual’s consumption of an artificially scarce good is zero, price always exceeds marginal cost, so consumption is inefficiently low. There is a deadweight loss, as illustrated in text Figure 17-4, shown next. Case Studies in the Text Economics in Action From Mayhem to Renaissance—This EIA discusses the dramatic decline in crime over the past 900 years, and explains how this led to growth and development within the economy. Ask students the following questions: 1. What explains the dramatic decrease in crime over the past 900 years? (The provision of public goods such as defense and good governance.) 2. Explain why good governance is a public good. (Everyone can enjoy the benefits of good governance, and the enjoyment or use by one does not diminish the enjoyment or use by another.) American Infrastructure Gets a D+—This EIA looks at the state of public infrastructure in the United States. Ask students the following questions: 1. In what way is the infrastructure a public good? (It is impossible to exclude residents from the benefits of infrastructure.) 2. Why has infrastructure deteriorated in the United States? (It has been a casualty of political gridlock and short-sightedness.) Saving the Oceans with ITQs—This EIA explains how individual transferable quotas can help solve the problem of overfishing in the ocean. Ask students the following questions: 1. What is an individual transferable quota? (A transferable license that allows the holder to catch a certain amount per year.) 2. How do ITQs help solve the overfishing problem? (Since the ITQ can be sold, there is value in maintaining the fish population because this maintains the value of the license.) 21st Century Piracy—This EIA discusses the piracy of intellectual property. Ask students the following questions: 1. Why are intellectual property goods easily pirated? (Because once a good is created, the marginal cost to deliver another unit is zero.) 2. Why must intellectual property be artificially scarce? (The marginal cost to society of the intellectual property is zero, yet producers charge a positive price for it. Without that positive price, producers won’t have the incentive to produce the intellectual property.) For Inquiring Minds Voting as Public Good—This FIM follows the Global Comparison on the same topic. It considers voter turnout in major democracies, showing a decrease over recent years. When Fertile Farmland Turned to Dust – This FIM discusses the mismanagement of water as a common resource and how a once plentiful and seemingly endless supply of water is close to running dry. Global Comparison Voting as a Public Good: The Global Perspective—This Global Comparison presents the voter turnout rate for nine different countries and discusses alternative policies to promote voter turnout in various countries. Business Case Maurice dale Game Ranch and Hunting Endangered Animals to Save Them—This business case explains how legalized hunting can actually save an endangered species from extinction. Handout 17-1 Date_________ Name____________________________ Class________ Professor________________ Willingness to Pay for a Public Good The following table shows the marginal benefit that accrues to each of the three people in a society for the consumption of a public good. • Quantity • MB1 • MB2 • MB3 • MBT • MC • 10 • $90 • $45 • $35 • $170 • $110 • 20 • 80 • 40 • 30 • 150 • 110 • 30 • 70 • 35 • 25 • 130 • 110 • 40 • 60 • 30 • 20 • 110 • 110 • 50 • 50 • 25 • 15 • 90 • 110 1. If the marginal benefit for society for a public good is the sum of the individual marginal benefits, complete the MBT column in the table above. 2. What is the optimal quantity of the public good that should be produced? Answers • Quantity • MB1 • MB2 • MB3 • MBT • MC • 10 • $90 • $45 • $35 • $170 • $110 • 20 • 80 • 40 • 30 • 150 • 110 • 30 • 70 • 35 • 25 • 130 • 110 • 40 • 60 • 30 • 20 • 110 • 110 • 50 • 50 • 25 • 15 • 90 • 110 1. If the marginal benefit for society for a public good is the sum of the individual marginal benefits, complete the MBT column in the table above. See table above. 2. What is the optimal quantity of the public good that should be produced? 40 units, where MBT = MC. Handout 17-2 Date _________ Name ____________________ Class ________ Professor ________________ Are These Public Goods? Are the following public goods? Why or why not? If so, how could the problem be fixed? • Highways • National defense • Voting Answers • Highways (Toll roads do exclude drivers. If a highway is very crowded, consumption is rival in nature.) • National defense (Once national defense is provided, no person can be excluded from its benefits.) • Voting (Voting suffers from a free-rider problem.) Chapter 18: The Economics of the Welfare State What’s New in the Fifth Edition? • Updated business cases Chapter Objectives • Define the welfare state and discuss the rationale behind it. • Define poverty and explain the causes and consequences of poverty. • Discuss how income inequality in America has changed over time. • Discuss how programs like Social Security affect poverty and income inequality. • Discuss the special concerns presented by health care insurance. • Explain why there are political differences regarding the size of the welfare state. Teaching Tips Poverty, Inequality, and Public Policy Creating Student Interest Ask students if they consider themselves (or the average college student) “rich” or “poor.” Ask them how they might define “rich” and “poor.” Are they poor compared with the average person in the United States? What about the average person in Africa? What about the average university faculty member? Presenting the Material • Give the students the most recent poverty threshold information. For 2016, the poverty threshold was $11,880 for an individual and $24,300 for a family of four (two adults, two children). Explain that poverty looks at the relationship between the minimum needs of people and their ability to meet those needs. This brings up two important questions: “What are minimum needs?” and “What amount of money is required to meet those needs?” Present the federal government’s approach to answering those questions (e.g., the calculation of the poverty threshold). The Census Bureau’s website (see Web Resources) provides complete information on the measurement of poverty, its history, and issues related to the poverty threshold. 1. Identify the lowest monetary cost of a nutritionally sound minimum diet. Ask students how well they think they could identify a nutritionally sound diet—and find the lowest-cost way to provide it. Most people would not be able to determine a nutritionally sound diet (and if they could, would have real difficulty finding the lowest-cost way to provide it). Ask the students what types of foods are nutritionally sound and low cost. Note that the minimum diet contains sufficient calories to maintain body weight (i.e., not starve!). 2. Multiply by three to allow for expenditures for nonfood goods and services. Why by three? When the poverty threshold was first developed, it was assumed that low-income families spend one-third of their income on food. Ask students if they think they spend one-third of their income on food. Do most people spend one-third of their income on food? What must be covered by the other two-thirds of the poor family’s income? 3. Take the poverty threshold for an individual or family of four and walk the class through the following calculations. • What is the annual food budget of an individual who is not poor (1/3 of $11,881, the poverty threshold, + $1)? $11,881/3 = $3,960. • What is the weekly food budget? $3,891/52 = $76.16. • What is the daily food budget? 74.83/7 = $10.88. • What is the per-meal budget, if you eat three meals per day? $10.69/3 = $3.63. • Ask students to describe the nutritionally sound meal they would purchase for this amount. Note: If you do this calculation for the family of four, it comes to $1.85 per person per meal. • How much money is left for nonfood purchases? $11,881 – $3,960 = $7,921. ($16,200 for a family of four). That is about $660 per month ($1,350 for the family of four). What must be covered by the $660 per month? Housing, transportation, clothing, medical care, etc. • Remember, these numbers are for an individual (or family of four) that is not poor according to the poverty threshold. Discuss what changes have occurred in the United States since the poverty threshold was first developed that affect the validity of this measure of poverty (see the Census Bureau website for resources: https://www.census.gov/). The U.S. Welfare State Creating Student Interest • Ask students what types of government assistance is available for college students. Examples will include scholarships, grants, loans, and work-study programs. Classify each of the types of assistance as means-tested or not. (What other types of “tests” are used to allocate assistance?) Identify in-kind assistance (providing books, computers, housing, or meals). What are the pros and cons of means-tested programs versus programs based on other qualifications (e.g., ability-based)? Compare the benefits of in-kind assistance versus cash assistance. Presenting the Material • Explain to students the three reasons for government spending: 1. To provide public goods (e.g., national defense) 2. To provide social insurance (Medicare, Social Security, unemployment insurance) 3. To redistribute income (means-tested government programs) • Time and interest permitting, you may wish have a discussion about the different social insurance programs and how they work. Students are not likely to know much about any of these programs. The Social Security Administration (ssa.gov) provides information about estimated benefits upon retirement based on income earned during a worker’s lifetime. • The website http://www.cbpp.org/research/federal-budget/policy-basics-where-do-our-federal-tax-dollars-go provides the following information on the federal budget in 2015: Federal Spending 2015 • Category • Percent of federal spending • Social Security • 24% • Defense • 16 • Various safety net programs • 10 • Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and Affordable Care Act (ACA) marketplace subsidies • 25 • Interest • 6 • Education, training, and employment • 6 • Veterans’ benefits and federal retirees • 8 • Transportation • 3 Discuss each category and whether it is a part of the welfare state. Ask students which spending categories they think are most likely to reduce poverty and income inequality and why. The Economics of Health Care Creating Student Interest • Ask students where they would go if they were sick and needed health care. Responses will include the student health center on campus, the emergency room of a nearby hospital, a local emergency care center, and their family physician. Ask students what their options for health care would be if they weren’t college students and had no private insurance. For each example, ask who pays for their health care. Remind students that even if their care comes at no cost to them (the “free” campus health center) or is paid for by insurance, someone must pay for their care. It is generally a mix of the individual (through university fees, insurance premiums, or deductibles and co-pays) and the government. The government subsidizes all forms of health care in some way. In 2008, 46% of health care costs were paid for by the government. Presenting the Material • Figure 18-5 in the text identifies who pays for healthcare in the United States (private or government) as of 2014. A good place to search for updated information is the Center on Budget and Policy Priorities (www.cbpp.org). Students are sure to be aware of the ACA and will probably have mixed opinions about whether it is a good idea or a bad idea. This is a very current topic so you may want to search the internet for updated information. There is also information available on https://www.hhs.gov/healthcare/about-the-aca/index.html. The Debate over the Welfare State Creating Student Interest • Return to the federal budget data and ask students if they think the amount of federal spending (approximately $3.9 trillion in 2016) is too high, too low, or just right. Use the infographic at https://www.cbo.gov/publication/52408 to inform them of how spending is allocated. Ask them if they think the allocation of that spending is “correct.” Use their responses to introduce the debate over the size and role of government. Presenting the Material • For each of the spending categories listed in the Federal Spending 2015 table, help students to create a summary statement of the view of the “left” and the “right” with regard to the appropriate amount of spending in that category. The statement should include whether it should be smaller, larger, or not change and a concise statement of why. Make sure that the class understands that there is no one correct answer to these questions and that, in fact, economics cannot resolve this debate! Common Student Pitfalls • Absolute versus relative poverty. The poverty threshold is used to determine the official estimate of how many people/families live in poverty. The poverty threshold sets an absolute level for poverty in the United States. However, in a relative sense, all but the richest person can be considered poor (relative to someone else). Who is considered rich and who is considered poor is normative. The poverty threshold makes a subjective determination that provides a positive measure for defining poverty. Students may not understand the difference between absolute poverty based on a specific scale and relative poverty, as defined by their own subjective measurement. • Political versus economic analysis. Make sure that students differentiate between economic analysis and their personal values and opinions when discussing the welfare state. Student views on the debate over the size and role of government can be very personal and intense. Make sure that students understand that there is no correct answer (that is why there continues to be a debate) and they must focus on economic analysis and allow each individual to have his or her own values and opinions. Chapter Outline Opening Example: The opening example discusses the Patient Protection and Affordable Care Act (ACA, or Obamacare). The ACA works differently from Medicare and Medicaid because it is run through private companies and is subject to extensive regulation. This example highlights the intense dispute over the appropriate size and role of the welfare state. I. Poverty, Inequality, and Public Policy A. The logic of the welfare state 1. The welfare state is the collection of government programs designed to alleviate economic hardship, including government transfers, poverty programs, and social insurance programs. B. The problem of poverty 1. Trends in poverty a. A graph of the U.S. poverty rate from 1967 to 2015 is presented in the text. 2. Who are the poor? a. Minorities b. Female-headed households c. The underemployed 3. What causes poverty? a. Lack of education b. Racial and gender discrimination c. Bad luck 4. Consequences of poverty a. Lack of access to healthcare b. Difficulty finding affordable housing c. Children are not given an equal opportunity to succeed C. Economic inequality 1. When the bottom 20% of the population receives 20% of the income, then income distribution is perfectly equal. 2. The distribution of income around the world is illustrated in the text. D. Economic insecurity 1. The welfare state exists to reduce poverty and inequality and to reduce income insecurity. 2. Income insecurity can come from a sudden loss of income or a sudden increase in expenses. II. The U.S. Welfare State A. The U.S. welfare state consists of three huge programs (Social Security, Medicare, and Medicaid), several large programs (temporary assistance for needy families, food stamps, and the negative income tax), and some smaller programs. The costs of the major programs are listed in text Table 18-2. B. Means-tested programs 1. A means-tested program is a program available only to individuals or families whose income falls below a certain level. C. Social Security and unemployment insurance 1. Social security guarantees retirement income to qualified Americans and provides benefits to disabled workers and surviving spouses. 2. Unemployment insurance provides to workers who lose their job about 35% of their previous salary until they find a job or until 26 weeks have passed. D. The effects of the welfare state on poverty and inequality 1. Text Table 18-3 presents information about how government programs affect poverty. 2. Text Table 18-4 presents information about how government programs affect income inequality. III. The Economics of Health Care A. In the United States, the government pays almost half of all healthcare costs and indirectly subsidizes private health insurance through the tax code. B. The need for health insurance 1. In 2015, U.S. healthcare costs averaged over $9,500 per person, much of which was covered by insurance. 2. Insurance companies overcome adverse selection through screening. 3. Employment-based health insurance is another method used to overcome adverse selection. C. Government health insurance 1. In 2015, the majority of Americans who were not covered by private insurance were covered by the government under Medicare or Medicaid. 2. Medicare is available to all Americans 65 and older and is financed by payroll taxes. 3. Medicaid is a means-tested program paid for with federal and state government revenue. 4. The Veterans Health Administration is run by the government and takes care of those who were and are in the military. D. Health care in other countries 1. Health care systems in the United States, Canada, France, and Britain are compared in Table 18-6. E. The Affordable Care Act 1. In 2010, Congress passed the Affordable Care Act. 2. Covering the uninsured is one objective of the ACA. a. Everyone is required to buy health insurance so that there will be a mix of healthy and sick people in the pool, and the problem of adverse selection is avoided. b. Insurance companies must offer insurance to those with preexisting conditions. c. Government subsidies are offered to low-income and lower-middle-income people. 3. Controlling costs is a second objective of the ACA. The hope is that new regulations will reduce the rate at which healthcare costs rise. 4. The initial effects of the ACA indicate there are fewer uninsured people, mostly because those under the age of 24 can remain on their parents’ insurance. IV. The Debate over the Welfare State A. Problems with the welfare state B. The politics of the welfare state Economics in Action Long-Term Trends in Income Inequality—This EIA presents trends in income inequality in the United States over time. Ask students the following questions: 1. What happened to income inequality in the United States from the 1930s to today? (Inequality decreased in the 1930s and 1940s, it was stable for 35 years after World War II, and it increased over the past 30 years.) 2. What “possible explanations” are given for the changes in income inequality during these three eras? (Policies enacted during World War II led to reduced inequality. Technological change and international trade are possible explanations for the increasing inequality in recent years.) 3. What characteristic of income inequality do the possible explanations fail to account for? (Income differences between highly skilled workers, such as teachers and business executives.) Case Studies in the Text Economics in Action Long Term Trends in Income Inequality in the United States – This EIA discusses the history of income inequality in the United States, highlighting the rise of inequality during the Gilded Age of the late nineteenth century, the drop during World War II, as well as the rise again to the present time, which some call a new Gilded Age. Welfare State Programs and Poverty Rates in the Great Recession, 2007–2010—This EIA demonstrates that the poverty rate during the Great Recession would have been much higher in the absence of welfare state programs. Ask students the following questions: 1. Did the poverty rate rise during the Great Recession? (Yes, but only by a small amount.) 2. How were antipoverty programs able to prevent the poverty rate from rising dramatically during the Great Recession? (Food stamps and other types of assistance programs automatically expand during a recession.) What Medicaid Does—This EIA discusses the effectiveness of the Medicaid program. Ask students the following questions: 1. How were the results of the study obtained? (In 2008 Oregon granted Medicaid benefits to some people by lottery so the study was able to compare people who received the aid with those who did not.) 2. Describe some of the differences that Medicaid made to poor families. (There is a list of differences in the text.) French Family Values—This EIA compares the size of the welfare state and the level of efficiency in the United States and France. Ask students the following questions: 1. How does the size of the welfare state in the United States compare with other major advanced countries in general, and France in particular? (The United States has the smallest welfare state of any major advanced economy; France has the largest.) 2. What evidence supports the idea that France’s large welfare state has a negative effect on efficiency? (French GDP per capita is only 72% of the U.S. level. French workers have the same productivity as U.S. workers, but work less. High taxes in France may lead to a decreased incentive to work.) 3. What evidence suggests that France’s large welfare state does not negatively affect efficiency? (The statistics for French and U.S. workers in prime working age are the same. The French receive free education through college, more vacation days, and can retire early with retirement benefits.) For Inquiring Minds Justice and the Welfare State—This FIM presents the views of philosophers John Rawls and Robert Nozick. Rawls conceived of a “veil of ignorance” that would lead to a generalized version of the Golden Rule for income inequality. Nozick responded with a libertarian view that rights, not results, are key to determining the appropriate level of income inequality. A California Death Spiral—This FIM explains how adverse selection led to the closure of Pac Advantage, a California health coverage “purchasing pool” for small businesses. Global Comparison Income, Redistribution, and Income Inequality in Rich Countries—This Global Comparison presents Gini coefficients for the United States, Canada, and six European countries. Business Case Ruby Hill Farm: The ACA and Freedom to Farm—This business case discusses the ability for a farmer to concentrate on his farm after the ACA provided opportunities for him to buy health insurance. Web Resources For U.S. poverty data, go to the Census Bureau at https://www.census.gov/topics/income-poverty/poverty.html. For the latest global data on poverty, go to the World Bank Poverty Net at http://web.worldbank.org/. To find the most recent federal spending data from the Office of Management and Budget go to https://www.whitehouse.gov/omb/. For information and data on health insurance in the United States go to the Census Bureau at https://www.census.gov/topics/health/health-insurance.html. For information and classroom resources for teaching about John Rawls and Robert Nozick, go to “Philosophy Resources on the Internet: Episteme links” at http://epistemelinks.com/. For the 2016 Federal Budget, go to http://www.cbpp.org/research/federal-budget/policy-basics-where-do-our-federal-tax-dollars-go. Handout 18-1 Date _________ Name ____________________ Class ________ Professor ________________ Are Taxes Theft? Robert Nozick, in his book Anarchy, State and Utopia (1974), argued that taxes are theft and violate a person’s basic property rights. In other words, taxes by their very nature are unfair. Develop arguments for and against this proposition. To Each According . . . Evaluate the famous quote from Karl Marx: “From each according to his ability, to each according to his needs.” What does this statement mean? If an economy were organized this way, would it be efficient? Why or why not? Would it be fair? Instructor Manual for Microeconomics Paul Krugman, Robin Wells 9781319098780
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