Question 1: Below you will find information on the share distribution of income in three countries for 2009. Fill in the "Cumulative %" columns before answering the questions below.
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Country A (20091
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C untry B (2009)
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Country C (20091
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|
|
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Income quintile
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% of household income
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Cumulative %
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% of household income
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Cumulative %
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%of household income
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Cumulative %
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|
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Bottom 20%
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2.5%
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10%
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5%
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|
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Second 20%
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6.5%
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10%
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10%
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|
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Third 20%
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12%
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15%
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15%
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|
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Fourth 20%
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21%
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30%
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25%
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|
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Top 20%
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58%
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35%
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45%
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a. On a single graph, draw a line of absolute equality, along with the Lorenz curves for all three countries. Label your graph clearly and completely. In which country is income distributed most equally? How can you tell? Explain in 2-3 sentences.
b. Which country has the most unequal distribution of income? Suppose that country wanted to defend its high inequality. Give one argument that country might use to say that inequality can be a good thing and explain in 2-3 sentences. In your answer, draw on themes from the class lecture/discussion or the readings.
c. Suppose the country with the most equal distribution of income (your answer to part a) wanted to defend its low inequality. Give one argument that country might use and explain in 2-3 sentences. In your answer, draw on themes from the class lecture/discussion or the readings.
Question 2: The analysis of externalities.
a. Education provides positive externalities: while it benefits the individual receiving the educational training directly, society as a whole also benefits from an educated and informed population. Using the table on the next page, plot the marginal cost and marginal private benefit curves.
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Quantity
(students)
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Marginal Cost of
Education (per student)
|
Marginal Private Benefit
of Education (per
student)
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Marginal
Private+Social
Benefit of Education
(per student)
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100
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$2500
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$4000
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200
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$3500
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$3500
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300
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$4500
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$3000
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|
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400
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$5500
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$2500
|
|
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500
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$6500
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$2000
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|
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600
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$7500
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$1500
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|
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700
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$8500
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$1000
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b. How much education would be provided by the market, in terms of the total number of students, if you assume that universities do not incorporate the marginal social benefits of education into account?
c. Assume that each additional 100 students provides an additional marginal social benefit of $1500 per student. Fill in the last column with this new information and graph the new curve on the same graph you produced in part a. Why does education lead to these additional social benefits? How are they different from the marginal private benefits of education? Explain in 2-3 sentences.
d. Using the new information from part c, how much education would society prefer the market to provide - i.e., what is the equilibrium level of education when both marginal private and marginal social benefits of education are taken into account?
e. Supplying more education is costly from the standpoint of the market, but it's ultimately beneficial to society: name a policy that the government can use to make it easier for universities to provide more education.
Question 3: Give three examples of market transactions that lead to negative externalities and explain, for each example, how the government can reduce each type of negative externality by limiting the amount of transactions that take place. Limit your explanation of each type of negative externality to 2-3 sentences.
Question 4: List one way that a market-based health insurance system fails to limit costs. Then, discuss how either the Affordable Care Act or a single-payer system would correct that failure.