Econ 4150/5150 Final Project Presentations
Introduction
 The functions of government
Externalities and Public Goods
 Pigouvian taxes
 Environmental protection
 The Coase theorem
 Public goods
Political Economy
 Representative Democracy
 Lindahl pricing
 The median voter theorem
 Arrow’s Impossibility Theorem
 The Tiebout model
Presentations cont.
Education
 Education vouchers
 No child left behind
Inequality, Poverty, and Welfare
 The Lorenz Curve and the Gini
 The Poverty Rate
 Welfare Reform
 EITC
Taxation
 Tax incidence
 The Ramsey Rule
 Taxation and work incentives
 AMT
 The Estate Tax
Presentations cont.
Social Insurance
 Health Savings Accounts
 Managed Care
 Health Insurance Reform
 The history of social security
 Financial solvency of social security
 Retirement benefits in China
Functions of Government:
Legal Framework
• Government assigns citizens property rights.
This can be achieved through zoning, land-use
planning and contracts (Castle 2).
• With property rights clearly assigned, efficient
solutions can be met by two parties using
private bargaining assuming low transaction
costs as according to the Coase Theorem.
• Government also protects these rights and
makes sure that contracts are enforced.
Functions of Government:
Promoting Competition
• Government regulates business to ensure that
inefficient outcomes (such as artificially high
prices) are not reached through business
practices such as monopolies and cartels.
• In opposition to promoting competition,
government also assigns patents to new
products to encourage further progress and
growth through inventions.
Functions of Government:
Providing Public Goods
• Government provides public goods because they are nonrival and non-excludable. Pure public goods are are both.
• Non-excludable goods are goods that are accessible to
everyone and a person’s consumption of the good cannot
be prevented. These goods are subject to the free rider
problem, so government provides these goods by the
means of collecting taxes.
• A good is said to be non-rival if one person’s consumption
of the good does not hinder another’s consumption of the
good.
• Many goods are impure public goods meaning that they are
somewhat but not fully non-rival and non-excludable.
• Examples: Education, national defense, roads and
infrastructure, garbage collection, and police and fire
services
Functions of Government:
Correcting Externalities
• Government generally corrects negative externalities
such as pollution by implementing taxes on industries
causing these externalities. Subsidies are generally
implemented to encourage production of goods
creating positive externalities.
• A Pigouvian tax will bring quantity produced of the
good producing a negative externality down to a
socially efficient level.
• A Pigouvian subsidy will bring quantity produced of the
good producing a positive externality up to the socially
efficient level.
Functions of Government:
Promoting Equity
• The government redistributes income by collecting
taxes and using the revenue for providing social
programs because sometimes efficient outcomes are
not always the most equitable outcomes.
• Income is often redistributed to schools to create
equity in education that could not be met through
private funding.
• The government also acts as a safety net for people
who fall onto hard times.
• Examples: TANF, Food Stamps, Medicaid, Housing
Assistance
Functions of Government: Promoting
Economic Growth and Stability
• Three goals:
– To obtain full natural employment.
– To maintain a low rate of inflation
– To promote viable economic growth
• While it is universally acknowledged that
these goals should be sought, there is often
dispute on the best way to reach these goals.
Functions of Government:
Social Insurance
• It is sometimes necessary for government to provide
forms of social insurance due to the adverse selection
problem. This keeps the poverty rate low by preventing
the sick, disabled, unemployed and elderly from filing
bankruptcy.
• Adverse selection suggests that only those needing
medical attention will purchase health insurance
driving the cost of health insurance to equal the cost of
the medical bill
• Examples: Social Security and health insurances such as
Medicare.
References
• Castle, Emery N. "Property Rights and the
Political Economy of Resource Scarcity."
American Journal of Agricultural
Economics
60.1 (1978): 1-9. Print.
• Public Economics Wiki: Functions of
Government
Negative Externalities
• A negative externality or, spillover, exists when
producers or consumers of a good do not pay for
the external costs and said costs are passed on
to third parties (society).
• In other words, the free market equilibrium
production is greater than the socially efficient
level of production. The market over distributes
to the production of goods that inflict external
costs.
• Example: Pollution
Pigouvian Tax
• One way to correct negative externalities is to
impose a collective tax or Pigouvian tax. This
is a per-unit tax that is set equal to the marginal
damage at the socially efficient level of
production.
• By imposing this tax, the government
internalizes the externality to the market
participants (consumers and producers).
Pigouvian Tax
• The market will move
to the socially optimal
quantity if the tax is
levied equal to the
marginal damage.
• The primary goal of
the Pigouvian tax is to
reduce environmental
damage or pollution.
$
MSC
MC=S
200
80
Pigouvian Tax
50
MB=D
1000
Per- unit Pigouvian Tax = $150
1600
Q
Other Options
• Some argue that taxation is not the best way to
correct negative externalities because there are
no real incentives to find alternative ways of
producing goods that are environmentally
friendly.
• Environmental regulation has been a more
conventional approach to correcting
externalities in the United States, rather than
collective taxes, because it is more clear-cut.
Other Options
• In order to help correct negative externalities,
the government can impose a tax to encourage
less production and consumption of the good
connected with the damaging externality.
• The government can also require manufacturers
to reduce pollution by finding cleaner methods
of production.
• Or the government can assign property rights.
DEFINITION
• Environmental protection is a practice of
protecting the environment, on individual,
organizational or governmental level, for
the benefit of the natural environment and
(or) humans.
LEAD ORGANIZATION
• US Environmental Protection Agency (EPA)
• Established in 1970 by the Nixon Administration
• Purpose was to protect the nation's public health and
environment.
• Roles include preventing pollution and ensuring
enforcement of environmental laws.
The "Seven Priorities for EPA’s Future"
• Taking Action on Climate Change
• Improving Air Quality
• Assuring the Safety of Chemicals
• Cleaning Up Our Communities
• Protecting America’s Waters
• Expanding the Conversation on Environmentalism
and Working for Environmental Justice
• Building Strong State and Tribal Partnerships
BUDGET OF THE EPA
• A proposed budget is developed each February for
the upcoming fiscal year (Oct. 1st to Sep. 30th).
• The budget defines the Agency’s program goals
and objectives for the fiscal year.
• Budgets for selected years since establishment:
– 1970: $1,003,984,000
Workforce: 4,084
– 1985: $4,353,655,000
Workforce: 12,410
– 2010: $10,297,864,000
Workforce: 17,278
Major Challenges
• Improving agency-wide management
• Transforming EPA’s processes for assessing and
controlling toxic chemicals
• Improving implementation of the Clean Air Act
• Reducing pollution in the nation’s waters
• Speeding the pace of cleanup at hazardous waste sites
• Addressing emerging climate change issues
 In this article by Ronald H. Coase, he provides an
insight on externalities, transaction costs, and
property rights.
 Coase suggests that it is possible to receive an efficient
solution to externalities through private bargaining.
 Internalizing the Externality
 Be it through negotiations or government action, as long as
the external costs or benefits by the players actions are
compensated or fulfilled.
 When there are well defined property rights and
costless bargaining (transaction costs), negotiations
between the players creating the externality and
affected by; can reach a socially optimal solution.
 Examples of low transaction costs
 When there are: clear and simple rights, few parties, friendly
parties, familiar parties, reasonable behavior, instantaneous
exchange, no contingencies, low costs of monitoring, cheap
punishment
 As long as property rights are established, it does not
matter which player has those rights as long as they are
well established and assigned those rights.
 The significance to Coase’s Theorem is that this
involves little government intervention. Government is
only needed to assign property rights and to enforce
those rights.
 Coase’s Question : “Why won’t the market simply
compensate the affected parties for externalities?”
 Previously, Economists were satisfied with Pigou’s
solution to externalities which involved Government
involvement using taxation. Example would be taxing
the rancher for additional longhorns to create an
incentive.
 Problem
 Rancher has longhorns that trample the farmers crops
causing $100 dollars worth of damage.
 Farmer could build fence around his property for $50
 Rancher could build fence around his property for $75
 Two possible Laws
 Rancher’s Rights
 Not responsible for longhorns destroying farm
 Pays nothing and Farmer could put up own fence <50>
 Farmer’s Rights
 Farmer not liable for damaged crops
 Rancher can either pay for damaged crops <100>
 Or can pay for fence around ranch <75>
Rancher “the law makes me responsible for any damages that
my cattle do. There wouldn’t be damages if there was a
fence. Tell you what, I’ll pay you $50 a year so you can build
and maintain a fence.”
Farmer “If I agree, and you pay me $50 a year to fence my
corn, I won’t be any better off if I did nothing and you had
fenced your ranch, but you save $25. You shouldn’t receive
all of the gains from cooperation. You should give me a
share of the gains by paying me more than $50 for fencing
my corn fields.
Rancher “Ok, let’s split the savings. I’ll pay you $62.50 (50 +
(25/2=12.50)). That way we both are better off.
Farmer “Agreed”
 Assignment Problem
 Who to assign blame. Pollutants in the water and air.
 Damages are not always a simple valued dollar amount. It is hard to
measure suffering to a fixed dollar.
 Not always sure they will tell the truth about how much they are
“damaged”
 Hold Out Problem
 When there is shared ownership of property rights which gives each
owner power over others. One could hold out and demand more
compensation for damages. Multiple parties becomes a high
transaction cost.
 Free Rider Problem
 Steel plant pollutes water and the steel plant has property rights.
Fishermen can pay steel plant to reduce production. One fisherman
might not pay because everybody else already has and they all
already benefit from the reduction.
 Transaction Costs and Negotiating Problems
 Hard to negotiate with multiple parties.
 Cooter, Robert, and Thomas Ulen. Law & Economics.




Boston: Pearson Addison-Wesley, 2008. Print
Gruber, Jonathan. Public Finance and Public Policy. New
York, NY: Worth, 2007. Print
Nieswiadomy, Michael, Class notes. UNT 2009
Coase, Ronald H, Problems with Social Costs, 1960.
http://www.sfu.ca/~allen/CoaseJLE1960.pdf
"Ronald H. Coase: The Concise Encyclopedia of
Economics." Library of Economics and Liberty. Liberty
Fund, 2008. Sun. 21 Nov. 2010.
<http://www.econlib.org/library/Enc/bios/Coase.html
>.
Public Good properties

Nonexcludability-
regardless if one does not
pay for it, one cannot be
excluded from the benefits
of the public good.

Nonrivalry-regardless of
individual consumption
levels, all individuals
consume the same quantity
of the good simultaneously.
– Free-Rider Problem-
because most are not
altruistic, taxes must be
imposed to prevent those
from benefiting from what a
few pay for.
– Examples: National
Defense, Police, Fire
Protection, etc.
30
Pure Public Goods, Private Goods and
“Impure” Public Goods Examples
-The best example of a pure public good is national defense, as
the entire population is protected and we all receive the same
“amount” no matter how much (or little) we contribute.
-A private good, such as a 20 oz. soda cannot be enjoyed by
someone who does not pay for it and the consumers who decide
to buy it all receive the same amount.
-The public school system is a good example of an impure
public good; all children are provided education but those who
live in better areas can receive a better education as their
parents/guardians pay in higher property taxes.
31
Public vs. Private
-People receive the same amount of
benefit regardless of how much they
pay or don’t pay.
-Usually benefits society as a whole
-Pure and Impure public goods
-”impure”- some public goods can be
rival and/or excludable to some degree
-A public good can be provided by private
firms
-Ex: Lighthouse
-Free rider problem
-Everyone sees the same quantity and
decide what they're willing to pay.
-Goods are rival and excludable
-A private good can be provided
publicly
-Everyone sees the same price and
decide the quantity they are
willing to buy.
-In a competitive market private
goods can be provided efficiently
-No free riders
32
Privatization?
-Taking services that are supplied by government and turning them over to the
private sector for production
-Should certain goods be privatized?
-when goods and services are provided publicly costs can be spread over a large
group
-people value goods and services differently (ex. households without
children tend to put a lower value on high quality education)
-”commodity egalitarianism”- the notion that some commodities should be
made available to everyone. Socialized health care?
-Airport security? After 9/11 there was much debate over airport security
becoming federalized while others were afraid of government being held liable
for mistakes.
-Incomplete contracts- government can write a contract with the public
provider completely detailing the quality of the service that the government
wants. Sounds good, but it is impossible to predict every possible contingency.
33
Government must supply Public
Goods-The Island Wall Example

The socially optimal
efficient quantity-where
the aggregate sum of the
MBs of all those who
consume the public good
equals the MC.

Taxes must be levied on the public
to ensure the socially optimal level
of the public good for such reasons
as the free-rider problem, unequal
contributions amongst the willing
and the inefficiencies thereof.
– Determined to be Pareto
optimal or efficient where no
changes can ensure anyone to
be better off.
– Determined to be not Pareto
optimal or inefficient where
changes can ensure everyone
to be better off.
34
Government Behavior
How public goods are originated
Elected officials may engage in selfinterested behavior, countering their
intended purpose



Logrolling-trading votes amongst each
other to ensure passage of their own
agendas
Corruption and bureaucraciesseeking personal gain through the
sacrifice of public interest, achieved
usually through the interactions of special
interest groups and government bureaus,
who seek to expand their pay, power and
prestige.
Lobbying, special interests and
campaigning- legislators must finance
their campaigns to stay in office, they
receive some of this through special
interest groups who lobby to push their
political agendas through. The lobbyists
and special interests groups have lots of
money at stake depending on various
legislation.
35
Representative Democracy
What is it?
• Definition:
A type of democracy in which the citizens
delegate authority to elected representatives
Additionally…
• This form of democracy is what is found in the
United States government.
• It is especially popular in in heavily populated
regions where a more direct form would be
too complicated.
• The agents of our system of representative
democracy are the members of Congress who
serve in the House and the Senate.
Arguments For and Against
Representative Democracy
FOR
• The original intention was for the
elect to be highly educated and
able to understand the needs of
the people.
• Since the people choose their
representatives, then their voices
are heard in decisions.
• Requires representatives to listen
to the views of their constituents
and vote accordingly with the fear
of being voted out.
AGAINST
•
•
•
Representatives don’t always
vote the way the people would
prefer.
Recently, there has been less
stress on education and more on
choosing representatives that
share beliefs with segments of
the population.
Representatives may serve their
own needs instead of those of
the people.
http://ken-szulczyk.com/lessons/environmental_03.html
*Erik proposed this method for financing
public goods in order to demonstrate that
consensus politics was actually possible.
Preference Revelation Problem: The first problem is that
individuals have an incentive to lie about their willingness to pay,
since the amount of money they pay is tied to their stated
willingness to pay. Individuals may claim their willingness to pay
is low so that others can bear a much larger portion of the costs.
Preference Knowledge Problem: Even if individuals are willing to
be honest about their valuation of a public good, they may have
no idea of what the valuation actually is. This is common
especially among individuals who do not shop for these goods on
a regular basis (e.g. national defense and security, and fireworks).
Preference Aggregation Problem: Even if the two points above
are achieved, how can the government aggregate individual
values to a social value? This requires the government to get the
opinion of everyone in the United States which is impossible.
MEDIAN VOTER THEOREM
• Defined
– If all voters have single-peaked preferences, the
outcome of the majority voting reflects the
preferences of the median voter.
• No voting paradox exists
• Majority voting leads to consistent decisions
• History
– Originated from Duncan Black's 1948 article, “On
the Rationale of Group Decision-making”
– Popularized by Anthony Downs's 1957 book, An
Economic Theory of Democracy.
THEOREM ASSUMPTIONS
• Single dimension
– One issue with two opposite extremes
– The opposite extremes are reflected by the left and
right.
– The theorem tells us that c is going to win.
THEOREM ASSUMPTIONS
• All voters’ preferences are single peaked.
– Shows consistency in the voting
SINGLE PEAKED
• The table below shows c is preferred to b, and
when comparing c to d, c is also preferred over
d.
DOUBLE-PEAKED
• When double-peaked preferences are
introduced into the equation, there is a
possibility that a voting paradox will exist, which
leads to a inconsistency.
 Arrow is an American economist who won the Nobel
Prize in Economics in 1972 (jointly with John Hicks).
 He is know primarily for his contributions to social
choice theory.
 His most notable achievement is known as “Arrow’s
Impossibility Theorem.”
 Arrow proposed that (in a democratic society) a
collective decision-making rule should satisfy the
following criteria:
It can produce a decision even if some voters have multi-peaked
preferences.
It must be able to rank all possible outcomes.
It must be responsive to individuals’ preferences.
1.
2.
3.

It must be consistent.
4.

5.
6.
If every individual prefers A to B, then society’s ranking must prefer A to
B.
If A is preferred to B and B is preferred to C, then A is preferred to C.
Society’s ranking of A and B must depend only of individuals’
rankings of A and B. There must be an independence of
irrelevant alternatives.
Dictatorship is ruled out. Social preferences must not reflect the
preferences of only a single individual.
 All of this basically asserts that society’s choice
mechanism should be logical and respect individuals’
preferences.
 However, Arrow concluded that in general it is
impossible to find a rule that satisfies all these criteria.
 This is known as Arrow’s Impossibility Theorem.
 Based on this analysis, a democratic society cannot be
expected to make consistent decisions.
 Arrow’s theorem does not state that it is without doubt
impossible to find a consistent decision making rule
 It does say that one cannot guarantee that society will be
able to do so.
 For some patterns of individual preferences, no
problems arise.
 Obvious example: when members of society have identical
preferences.
Charles Tiebout (1924-1968)
• Argued that the ability of individuals to move across
jurisdictions produces a market-like solution to the local
public goods problem
• Showed that the inefficiency in public goods provision
came from two missing factors: shopping and competition
• Claimed that the threat of exit can induce efficiency in
local public goods production
• Argued that under certain conditions public goods
provision will be fully efficient at the local level
Tiebout Process
• Focuses on local public goods
• Promotes the efficient provision of public services
• Promotes innovation and experimentation of various
levels of services
• Allows citizens to pressure their local government to
provide a desirable package of services and provide
services efficiently
Assumptions
• There are no externalities across communities
• There are enough different communities so that each
individual can find one with public services meeting
his/her demands
• Individuals are completely mobile
• People have perfect information
• The cost per unit of public services is constant so that if
the quantity of public services doubles, the total cost also
doubles
• Communities can enact exclusionary zoning laws
Problems with the model
• Efficient outcome is not necessarily an equitable outcome
• Families are not perfectly mobile and do not have perfect
information
• No one city is a perfect match for someone’s most desired
preference
• Demand is not perfectly correlated with income
• Taxes are not addressed directly – instead, they are regarded as a
“price” for local public goods
• Tiebout fails to consider local budgetary processes
• Tiebout households “vote with their feet” – they don’t use the
ballot box – focus on the exit option, not the “voice” alternative
• Tiebout assumptions are so restrictive that the public goods
become essentially private
• Homogenous communities and profit maximizing governments are
contrary to our every-day experience
Sources
• Oates, Wallace E. “The Many Faces of the Tiebout
Model.” From: William A. Fischel, ed. The Tiebout
Model at Fifty. Cambridge, Ma: Lincoln Institute of
Land Policy, 2006, pp. 21-45.
• www.econ.iastate.edu/classes/econ344/otto/docum
ents/wk10-locgovt08.ppt
• www.econ.ucsb.edu/~hartman/Econ_130.../Lecture
01.ppt
Education Vouchers
• Definition
– A financial handout given to families with school-age
children for the purpose of education.
• Purpose
– To increase families financial freedom so their children have
the ability select the schools they want to attend, whether
it’s public or private education
• Their use in a current context
– Schools are funded by local income taxes which means
schools located in richer areas are better funded and
therefore usually provide the better education. Families in
low income areas, where the school has a smaller budget
and therefore usually doesn’t produce as high a quality of
education, could utilize the voucher system to send their
Uniform vs. Variable Voucher Plan
• Uniform Voucher Plan
– Every family receives the same dollar amount giving children
the ability to be selective over the school they attend.
However, this only covers the cost of the low-tuition schools
and families would have to use their own funds to send their
children to higher-tuition schools
• This type of voucher would also require a high tax revenue
in order to be maintained.
• Variable Voucher Plan
– Lower income families receive higher valued vouchers and
higher income families receive lower valued vouchers.
– Admission discrimination could occur with parents pursuing
socioeconomic interests. Richer families will want their
Argument For Vouchers
• Choice
– consumers are free to apply to their desired school. They
can choose between a public and private education; a
choice that only higher income families can currently make.
• Increased Efficiency
– As consumers with different incomes are put onto a level
playing field, with ability to choose which schools the
children can attend, children will go to schools where they
receive more education for the money they’re spending.
– This will lead to consumers no longer attending schools that
offer a lower quality of education and higher demand for
more efficient schools.
– This closely relates itself to the Tiebout mechanism with
Arguments Against Vouchers
• Excessive specialization
–Schools trying to appeal to a certain types of
students and not teaching subjects that are
considered core to a students education. This can
be overcome by government regulation but
requires yet an increase in cost
• Segregation
–There is a worry that segregation could occur from
differences in race, income, or child ability. Children
from motivated parents or are motivated
themselves will move to higher-quality private
Arguments Against Vouchers cont.
• Inequality
– If a uniform voucher is used then the tax payer is now taking on part of the cost
for sending children to private schools; which was a cost the family originally
bore. This will therefore increases the tax rate for the families of the children
who were originally attending public schools.
– Families sending their children to private schools would see their cost of
education decrease and therefore receive most of the benefit. Lower-income
families would relatively receive less of the benefit the voucher creates.
• Decrease in competition
– Efficiency is maximized in the education industry by having one large
provider rather than several smaller institutions competing against each
other. This creates the environment for natural monopolies to occur
which will lead to market failures.
– For Example, if a school shuts down and the unmotivated student
doesn’t apply to a new school or doesn’t have another school that’s
easily accessible then there is a high chance they won’t continue their
Education Vouchers in practice
• Political analysts continue to debate the benefits
and costs of education but there are only a few
examples where vouchers are used in the United
States.
–The voucher program that received most attention
is Milwaukee’s started in 1990. It now gives low
income families $5,000 to attend private schools.
–“Analysts are divided on whether actual voucher
experiments have been successful.” (Hoxby)
NCLB Beginnings
•
•
•
In 2001, President Bush No Child Left
Behind plan was passed by Congress and
took effect in 2002
Primary Focus is to hold schools
accountable for the performance of
students who are struggling to learn
This is the most sweeping reform of
Elementary and Secondary Education
Act (ESEA) since 1965
Source: www.ed.gov
Purpose
•
•
•
•
Increase accountability for student
performance
Focus on what works based on scientific
research
Empower parents and expand parental
involvement
Increase local control and flexibility
Source: www.texasprojectfirst.org/NCLB.html
Standards-Based
Assessment
•
•
•
Positive: difficultly comparing grades
across teachers and schools without
common standards
Negative: one-size-fits-all standards either
dumb down instruction or condemn lowability students to frequent failure
Synthesis: The NCLB’s requirement of this
assessment fails to acknowledge that there
is a learning cap for most children.
Source: www.ernweb.com
High-Stakes Consequences
•
Positive: a positive relation between highstakes consequences and performance on
assessments
•
Negative: relies excessively on extrinsic
motivation at the expense of intrinsic
motivation
•
Synthesis: average NAPE* increases were
much higher in high-stakes schools
compared with no-stakes schools
Source: www.ernweb.com
*National Assessment of Educational Progress
Mixed Report Card
•
•
•
•
Democrats and Republicans have
criticized NCLB
Test scores are higher in a large majority
of districts
Teachers report high stress and poor
staff moral due to NCLB consequences
Better alignment of class room teaching
with state academic standards
Source: www.greatschools.org
Work-Cited
•
www.ernweb.com
•
www.ed.gov
•
www.texasprojectfirst.org
•
www.greatschools.org
The Lorenz Curve
• The Lorenz Curve was crafted by Max Lorenz in 1905
• The first Lorenz curve had the axes inverted
causing an upwards bow.
• If we have data available on every member of a finite
population of n individuals then we can identify the Lorenz
curve as being one defined by first ordering the wealths of the
individuals from smallest to largest (denoted by x1:n, x2:n, …,
xn:n) and then plotting the points.
The Lorenz Curve
• Popular tool for quantifying and illustrating income
distributions
• Shows the proportion of total wealth verses the
percent of the population in ranked order.
• Solitary curves provide little significance for analysis;
they’re designed for comparison.
• L is continuous on [0, 1]
• L(0) = 0
• L(1) = 1
• L is increasing
• L is convex (originally concave)
The Gini Coefficient
or
Find the area between the curve and the line
Multiply by two
• The Gini is useful when comparing the income distributions of two
countries.
• Two examples are:
– Sweden an equal country with a Gini of 23.0
– Namibia an unequal country with a Gini of 70.7
• Gini Coefficients are easily found on the CIA World Fact book and the U.S.
Census Bureau
Simplified and Hypothetical Example
If given data for a population, reorder and add columns
to acquire the cumulative total % so that the table
appears as follows:
Name
Income
% of Total Pop % of Total
Income
Cumulative
Pop
Cumulative %
of Income
John
$20,000
10 %
25 %
10 %
Jane
$40,000
20 %
50 %
30%
Jack
$60,000
30 %
75 %
60 %
Jill
$80,000
40 %
100 %
100 %
$200,000
100 %
Use these two columns as coordinates
-Create a Lorenz Curve with the coordinates
-shade the area bounded the Lorenz Curve and
45˚ line
-this area multiplied by two is the value of the
Gini
The Gini Coefficient
• The Gini is useful when comparing the income
distributions of two countries.
• Two examples are:
– Sweden an equal country with a Gini of 23.0
– Namibia an unequal country with a Gini of 70.7
• Gini Coefficients are easily found on the CIA World
Factbook website
https://www.cia.gov/library/publications/the-worldfactbook/rankorder/2172rank.html
References
Betti, G., & Lemmi, A. (Eds.). (2008). Advances on Income Inequality and Concentration
Measures. New York, NY: Routledge.
Dadres, Susan. Public Economics. University of North Texas. Wooten Hall, Denton, TX. 20
Oct. 2010. Lecture.
Kleiber, C. and Kotz, S. (2003). Statistical Size Distributions in Economics and Actuarial
Sciences. Hobokn, NJ: John Wiley.
Lorenz, M.O. (1905). Methods of Measuring the Concentration of Wealth. Journal of the
American Statistical Association. 9 (70), 209-260.
"Distribution of Family Income - Gini Index." . n.d.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html
(accessed Nov 22 , 2010).
U.S. Census Bureau. (2009). Selected Measures of Household Income Dispersion: 1967 to
2009. Retrieved from
http://www.census.gov/hhes/www/income/data/historical/inequality/taba2.pdf
Poverty Line
• The Poverty Line, or Poverty Threshold, was
established near the start of “The War on Poverty”
in 1960.
• The Poverty Rate is the percentage of Americans
living beneath the Poverty Line.
• It is used to separate families who are living in
poverty to those who aren’t.
Official Poverty Threshold
• The official measure
of poverty is based on
a family’s pretax
income.
• Cash transfers like
TANF are counted.
• In-Kind benefits like
Medicaid and
Medicare are not.
1980
1985
1990
1992
1995
2000
2002
Poverty Before
In-Kind
Programs
13.0%
14.0
13.5
14.8
13.8
11.3
12.1
Poverty After
In-Kind
Programs
8.6%
10.1
9.5
10.5
9.0
7.6
8.2
New Poverty Measure
• The U.S. Census Bureau is developing a
new measure to assess the effects of antipoverty policies.
• The new measure will not be used to
determine eligibility for government
programs.
 Welfare- Financial or other assistance to a needy
individual or family from a national government
or organization.
Welfare reform began in earnest during the period of President
Roosevelt’s New Deal program in the 1930’s, a response to the Great
Depression. In 1935 Congress passed the Social Security Act, a large first
step in the direction of reforming welfare assistance in the United States
at the time. This act proved to be a stepping stone for many additional
government aid programs throughout several later presidents, such as
Lyndon Johnson’s Medicaid and food stamps and Ronald Reagan’s
Family Support Act of 1988. The depression had proven that the
government needed to take a more active role in its economy and the
financial welfare of its country’s citizens.
The three major cash welfare programs in the United States are the
Earned Income Tax Credit, Temporary Assistance for Needy Families, and
Supplemental Security Income.
Earned Income Tax Credit- The EITC is a refundable tax credit to those who work but
have low incomes. It is the nation’s “single largest cash antipoverty program,” and is
touted as the most successful welfare program in America.
Temporary Assistance for Needy Families- TANF is a financial assistance program whose
funds are distributed under stipulations issued at the state-level. National government
requirements are a 5 year limit on benefits and the recipient needing to work after 24
months of receiving benefits, but individual states can alter these deadlines.
Supplemental Security Income- SSI is a program designed to provide cash welfare to the
aged (over 65) and the disabled who have low incomes. It’s purpose is to fill the gap
between two social insurance programs: Social Security and disability insurance.
The iron triangle indicates the three goals of cash welfare. Unfortunately
the government only has two tools at its disposal here: it can change the
level of benefit guarantee, and it can change the benefit reduction rate. As
such, all three goals cannot be met at once.
 Cash welfare changed from entitlement to a block grant, essentially
retrospective to prospective federal reimbursement.
 States were allowed to experiment with alternate cash welfare
payment structures (altering percentages, extending deadlines).
 Time limits were imposed on recipients (5 years for life as a base).
 States were allowed to alter benefit amounts to an extent, based on
conditions such as broken families.
Unfortunately, what actions and programs actually constitute
“welfare” have been hazy throughout history, and as such have
sparked controversy as to how to implement assistance and who
should receive it. How to define “fair” in terms of welfare also causes
troubles. As such, welfare will continue to be reformed so long as
needs continue to arise in the future.
What is the EITC?
 Based on individual’s
taxable income
 America’s single largest
cash antipoverty program
(over $45 billion in wage
supplements in 2007).
 Also, the most successful,
keeping more than 4
million Americans out of
poverty each year.
-According to Elizabeth Kneebone, the Brookings Institute
What is Poverty?
Poverty is not knowing where you’re going to sleep, what you’re going to wear, or
what you’re going to eat. It is absolute uncertainty in your daily life.





Poverty can be measured in two
ways:
“Relative”, meaning the amount of
income the poor have relative to
the rich;
and “Absolute”, meaning the
amount of income the poor have
relative to some measure of
‘minimally acceptable income’.
The Poverty Line is what the U.S.
Government uses, developed in
1964, is based on the Absolute
Poverty/Deprivation measurement
Poverty Lines vary from time to
time and place to place
- from Gruber 480-481
The EITC Program
Designed to reduce poverty and increase quality of life
 The US Government works diligently to reduce
poverty.
 Originally based on the “negative income tax”
idea by economist Milton Friedman
 Enacted in 1975 and managed by the IRS
 Widespread support from both Republicans and
Democrats
 “a federal anti-poverty program that actually
works.” -Jeffery Jones, the Hoover Institute
The EITC
What you get:
 A Tax Credit is based off of your AGI (Adjusted
Gross Income) and is given to people who work
but earn low incomes of:
 Less than $13,440 a year (single, no children), can
receive up to $457.
 Less than $35,463 a year (single, one child), can
receive up to $3,043
 The Maximum amount receivable is $5,657 (with
3 or more qualifying children)
 Average received is $1,900 per person
-From the irs.gov website
The EITC/EIC
Summary
 The EITC is a program that works to reduce
poverty, but with some drawbacks: low enrollment
(although eligible), fraud, controversial screening
practices, etc.
 It has the power to transform individuals out of
poverty and raise our quality of life as a country.
 Still needs work to become more efficient, but is
the best we’ve got so far.
Tax Incidence





Determines if suppliers or consumers bear a certain
amount of the burden from certain taxes
The height of the curve determines the elasticity
Elastic- large response in quantity when price
changes
Inelastic- Small response in quantity when prices
changes
Whoever is less elastic bears most of the burden
Basic Rules




The side of the market on which the tax is imposed
is irrelevant to the distribution of the tax burden
Parties with inelastic supply or demand bear taxes;
parties with elastic supply or demand avoid them
Economic incidence- Division of a tax burden
according to who actually pays the tax
Legal incidence- Division of a tax burden according
to who is required under the law to pay the tax
Tax Incidence



The burden refers to the party that is legally
responsible for sending the tax dollars to the
government and typically falls on sellers
This burden is shifted to consumers by increasing the
products price
Ratio for consumers: Es/(Ed+Es)
p
S’
S
$3.50
D
90
100
Q
A tax on sellers when deman is relatively elastic
p
S’
$4.30
S
$3.50
$3.30
D
90
100
Q
Optimal Commodity Taxation
-Way of choosing tax rates where goal is to “minimize
deadweight loss for a given government revenue
requirement.”
-Frank Ramsey (the early 20th century economist) came up
with a question: “How can we raise a given amount of
revenue with the least amount of distortion?”
95
-This led to Ramsey coming up with the Ramsey
Rule:
“To minimize the deadweight loss of a tax system while
raising a fixed amount of revenue, taxes should be set
across commodities so that the ratio of the marginal
deadweight loss to marginal revenue raised is equal
across commodities.”
96
The Ramsey Inverse Elasticity Rule:
-For elastic goods, the tax rates should be lower, and for
inelastic goods, the tax rates should be set higher.
-The inverse elasticity formula:
(product x and product y)
97
Though the goal of the Ramsey Rule is to diminish deadweight loss
while raising revenue, attempting to adjust tax rates inversely
according to the elasticities of products has a some problems:
 It is difficult to determine the elasticity each good.
 It would promote lobbying of politicians by manufacturers/companies
who try to obtain lower prices for their own products.
 A company may have to hire someone in order to conform with
government requirements and regulations. This means an increase in
compliance costs of retailers.
 It would also raise the administrative cost of government auditors.
 Many citizens would find these tax rates unfair “because necessities have
inelastic demand and would be taxed at high rates while luxury items have
elastic demand and would be taxed at low rates.”
98
Because of these reasons, “it is probably not worth trying to
vary tax rates inversely with elasticities.” So having the same
tax rates for all goods seems to be the more sensible idea.
99
Taxable Income
Tax table:
 0-20,000-10%
 20,000-50,000-20%
 50,000-150,000-30%
 Above 150,000-35%

Assume your yearly income is $55,000.
 (20000)*(.1)+(30000)*(.2)+(5000)*(.3)=
 2000+6000+1500=9500 Taxable income

Average vs. Marginal tax rates

An average tax rate is the ratio of the amount of taxes
paid to the tax base.
Assume yearly income is still $55,000.
 Taxable income as computed on the
previous slide is $9500.
 Average tax rate would be:
 9500/55,000=.17= 17% Average tax rate

Average vs. Marginal tax rates






The marginal tax rate is the rate on the last dollar of
income earned.
Tax table:
0-20,000-10%
20,000-50,000-20%
50,000-150,000-30%
Above 150,000-35%
Assume yearly income is still $55,000.
 30% would be the marginal tax since the
last dollar of income earned is in the 30%.

Itemized Deductions
If you itemize, you can deduct a part of your
medical and dental expenses and un- reimbursed
employee business expenses, and amounts you paid
for certain taxes, interest,
contributions, and miscellaneous expenses. You can
also deduct certain casualty and theft
losses.
Alternative Minimum Tax





The Alternative Minimum Tax was introduced by the Tax
Reform Act of 1969 in response to 155 high-income
households that were eligible for so many tax benefits that
they owed little or no tax under the tax code of that time.
The AMT is a separately filed tax that eliminates many tax
credits and deductions, which increase tax liability for people
that would otherwise pay less in taxes.
If taxes owed through AMT are higher than regular income
taxes than the higher tax is paid or vice versa.
Though the AMT was intended to only affect taxpayers who
avoid paying taxes through exemptions, the tax has began to
pervade the pockets of many taxpayers.
Since the AMT is not indexed to inflation and recent tax cuts,
many more people are finding themselves subject to this tax.
Sources
Wiki
 IRS
 Americans for Fair Taxation

Background
• The United States presented
“Alternative Minimum Tax” as early
as 1969.
• The main reason is tax deductions,
tax incentives, etc. are over-used by
155 more than 200,000 U.S. dollars
high-income individuals.
Problems
• High-income households that were eligible
for so many tax advantages owed little or
no tax.
• Abuse of the tax deductions and
incentives erodes the tax base.
• It violates the principle of tax vertical
equity and affects efficiency of resources
allocation (labor supply, saving, investment,
production, etc.).
Alternative Minimum Tax
• “The alternative minimum tax (AMT)
attempts to ensure that anyone who
benefits from those tax advantages
pays at least a minimum amount of
tax.” (IRS, 2009)
• If taxes owed through AMT are
higher than regular income tax, the
higher tax should be paid.
Who pays AMT?
• If your taxable income for regular
tax purposes plus any adjustments
and preference items that apply to
you are more than the AMT
exemption amount. The exemption
amounts are listed in the Form 6251
Instructions.
Effects
• AMT has become a major source of
tax revenue of the U.S. government
and has been included in its longterm budget.
• How the government to identify what
deductions do not result in a number
of rich people pay tax but people
rarely use.
Effects
•
The amounts used to calculate the
AMT are not indexed inflation,
Congress has changed them quite
often. There are approximate one
third of taxpayers will be subject
to the AMT.

A tax on the capital (wealth) that a person
holds at death
› Taxable estate = all property (stocks, bonds,
housing, etc.) owned by the person who died
minus any debt outstanding plus gifts given
during the person’s lifetime
› If the estate is given to a spouse or charity,
there is no tax

Results in an incentive for people to give
away their estate before they die.
› This outcome is addressed with the requirement
that only annual gifts of up to $12,000 per
recipient are deductible.
Some view the estate tax as a double tax on
capital income that has already been taxed
under the income tax.
 Also called the “death tax.” Should death
be a taxable event?
 Should holding wealth be a taxable event?


Tax gifts and inheritances as a substitute or
complement to the estate tax
› Recipient pays tax according to the recipient’s
income (meaning the worth of the
gift/inheritance is added onto the recipient’s
taxable income)

Tax households annually or periodically on
their wealth
› It can be argued that wealth is a better measure
of ability to pay than income

Wealth can be difficult to measure.
› Value could be momentary (ex: stock market
fluctuations), so it is difficult to calculate a
person’s average wealth over a certain period of
time.
› Value of nonfinancial assets (house, car,
paintings, jewelry) is subjective.

Encourages a household to consume rather
than save
Most likely it won’t*
 Approximately 99% of all estates are
exempt from this tax.
 Only affects estates valued over $2 million
because of a large tax credit.

*Nothing is certain but death and taxes 
HSA
• Established as part of the Medicare Prescription Drug,
Improvement, and Modernization Act (2003)
• Considered a “consumer-driven health plan”
 Theory under consumer-driven plans is that consumers will spend their
health care dollars more wisely if they’re spending their own money
 Also, doctors will have an incentive to lower their rates because they’re
competing for consumers’ business.
• Developed to replace the Medical Savings Account
 MSAs covered self-employed and small businesses
 HSAs cover anyone who is employed and who meets requirements.
Who is eligible?
•





Any individual that:
Is covered by an High Deductible Health Plan (HDHP)
Is not covered by other medical insurance
Is not enrolled in Medicare
Can’t be claimed as a dependent on someone else’s tax return
Most important requirement is that you MUST have a High
Deductible Health Plan to be paired with your HSA.
What is a High Deductible Health Plan?
• Well, it is an insurance plan that has high deductible (the
amount you must pay before insurance takes over)
• However, the monthly premiums are lower than a traditional
health plan
• In general, most health expenses incurred go toward the outof-pocket maximum. Once the maximum is reached after the
HSA deductible is met, the health insurance company will pay
for all covered health care services for the rest of the calendar
year.
Individual
Family
•
Figures for 2010
Minimum
Deductible
$1200
$2400
Max. contribution
$3050
$6150
Max. out-of-pocket
$5950
$11900
What is the supposed benefit?
• Advocates view HSAs as a rather simple process.
1) People save money each month by paying lower premiums
2) They then put those savings into an HSA
3) Funds can be used to pay deductibles for routine visits and minor
procedure and/or they can accumulate up to the maximum contribution
level to be used should a costly medical issue arise
• Any contributions, interest gained, or deductions are not
subject to tax if they are used for qualified medical expenses.
• Overall lowering of health care costs
• You can choose how your money is spent
• Able to seek best quality and cost
HSAs Are Not Perfect
• An example demonstrating how HSAs can backfire:
You may have chosen an HSA for the low monthly premium in order to save
money. Consider a situation in which you need emergency surgery. Your
annual deductible is $4000, however, you have not made any payments
toward that because you have not had any visits to the doctor. The
surgery costs $5000. This leaves you stuck with having to pay $4000.
Insurance will kick in and pay the remaining $1000.
Would paying a low monthly premium be worth the risk of having to pay your
full deductible—or a large portion of it—all at once?
If you are wealthy, the answer may be yes.
If you are not wealthy and you chose an HSA because of the low premiums,
the answer is probably no.
Problems with HSAs, cont.
• Despite low premiums, setting aside money for an HSA would
be especially difficult for:
1) The elderly (largely because it is harder for them to save
money)
2) People of any age who require frequent medical care and do
not have high income
• There are many more issues regarding this
topic that could not possibly be included. It is
an interesting topic and HSAs are a policy that
many experts believe can be a viable option.
Many calls to reform its rules have been made
and how it will evolve and change to meet
insurance needs will be of great importance.
What is it?
•Managed care is a process involving techniques
to reduce the overall cost of healthcare
•Specific examples include: cost-sharing
incentives for outpatient surgery, programs which
review the medical necessity of certain services
and operations, and controls on the admission of
inpatients and how long their stay should be
History
• Richard Nixon was the first political figure that
took steps to change the health care system
from a non-profit business to a profit business
which would be run by the insurance
companies
• The Health Maintenance Organization Act was
passed in 1973 by Congress; this encouraged
rapid growth of HMOs, classified as the first
kind of healthcare
Problems
• The cost of care was driven upwards due to the
desire for more profit by individuals involved in
the industry
• The rising costs meant more uninsured people,
it drove away possible health care providers,
and decreased the overall quality
• Basically, people can’t pay!
Specific programs
• HMO (Health Maintenance Organization
• IPA (Independent Practice Association)-specific
type of HMO that works as a fee-for-service for
patients under a contract to a group of
physicians
• PPO (Preferred Provider Organization)-allows
individuals to receive a discount below the
regularly charged rates by physicians. PPOs
are the least expensive type of coverage
Did it work?
• Critics argue both ways (that it did and did not
achieve its overall goal)
• One side says no because the cost of
healthcare has gone up and there are more
uninsured individuals due to this
• The other side says yes because it has
increased efficiency and improved the overall
quality of care given and received
Health Reform
• Retrospective health insurance
– Pre 1980s
– Doctors were free to run any test necessary
– Insurance only paid bill, no say in health care
• Prospective health insurance
– Mid 1980s
– HMOs (Health Maintenance Organizations)
– Insurance company hired doctors to cut test cost
The largest and still rising government
expenditure
• In 2004 health care accounted for about 16%
of the USA GDP.
• US spends about $1.9 trillion a year on health
care, that’s about $6,470 per person.
• Its forecast that by 2075 about 38% of GDP.
• Yet there is still about 46 million Americans
still uninsured.
How are people insured?
• 198 million people are insured through the
company they work for. 60% of pop.
• About 27 million purchase insurance their
selves. 9% of pop.
• 80 million people receive public health
insurance via Medicare, Medicaid or Tricare.
How health insurance work?
• Firms or individuals pay “premiums” to
insurance companies. In return, the insurance
company pays health care providers when the
individual has claims.
• Individuals often pay for part of the cost of
their actual utilization, in one of three ways:
– Deductible
– Copayment
– Coinsurance
How does public health care works?
• Medicare is the federal program that provides
health insurance to all people over age 65 and
disabled persons under age 65.
• Medicaid is the federal and state program that
provides health care for the poor.
• TRICARE and CHAMPVA are health insurance
programs targeted toward those currently or
formerly in the military, and their dependents.
Why health care cost rising?
• Quality-improving technological change in
health care. (Top Reason)
• Since technology is better people live longer,
and require more health attention.
• High number of uninsured in the United States.
Origins OF Social
security
• Middle Ages in Europe
• Brought to the U.S. by colonists
• European trade guilds began first financial programs
• Series of “poor laws” developed in England to assist needy
• Used taxation as a way to help the poor
• Individuals were classified by the elders
• There were no standards to identify who was “poor”
• English Poor Law of 1601
• First system classifying the “deserving” from the “undeserving”
• Used tax revenue to fund relief projects
Modern history of
social security
• U.S. experienced first social security program during the Civil War
•
Only injured Union soldiers or their widows were eligible for pension payments
• The Social Security program came about during the Great Depression
•
Savings were wiped out due to the 1929 Stock Market Crash
• In 1934, the Committee on Economic Security (CES) was formed
•
Based on FDR's social insurance program to provide income to the elderly & disabled
•
Created a plan that allowed workers to put a small percentage of their monthly income
into a savings account
•
Once retired, these workers could rely on that account to help pay for life’s expenses
• The CES ultimately became the Social Security Act of 1935
Amendments
• 1939
• Economic security now family-based (for dependants) vs.
individual based
• Provides benefits for retirement, disability, premature death
and medical costs after retirement
• 1950’s
• Added to participant base, virtually universal coverage
• Increased the benefit, cost of living adjustments (COLA)
• Disability benefits
• 1960’s
• Medicare
• Reduced retirement at age 62
Amendments
(cont.)
• Reagan
• Disability Reforms Act, 1984
• Raised the retirement age starting in 2000
• Increased reserves in Social Security Trust Funds
• Clinton
• 1996 Welfare Reform
• “Ticket to Work and Work Incentives Improvement Act of
1999”
• Provides disability beneficiaries with a voucher they may use to
purchase vocational rehab services, employment services, and
other support services from an employment network of their
choice
• Law H.R. 5, The Senior Citizens’ Freedom to Work Act of
2000
Social Security
today
• The system is work related
• Benefit levels for retirees and their families are related to earnings
history and wage level. The higher the contributions, the higher
the benefits.
• Benefits are not means tested
• Benefits are paid regardless of income from savings, pensions,
insurance, or other forms of non-work income. Workers do not
have to prove need to receive benefits.
• Universal compulsory coverage
• Workers may not opt out of the Social Security system. By
mandating participation, adverse selection is avoided.
• Benefits are defined by law
• Any person who meets the legal requirements qualifies for
benefits. Disagreements may be taken to court.
Social Security
today (cont.)
• The retirement benefits of the elderly are provided by the
earnings of the younger employed Americans, which has
caused a shortage in Social Security funds over the years.
This is due to:
• Increasing life expectancy
• Low birth rates
• Slow growth rate in wages
• Largest government program
• Single greatest expenditure at 20.9% of federal budget
• Social Security reform has become a very controversial issue
Resources
• http://www.nysscpa.org/cpajournal/2006/506/infocus/p15.htm
• http://www.pbs.org/now/politics/socialsecurity.html
• http://www.ssa.gov/history/briefhistory3.html
• http://www.socialsecurityreform.org
Beginnings of Social Security

When Social Security was established as part of the
New Deal, there was debate over which tax system
should be used to fund the Social Security program.

The first idea was for each generation to pay payroll
taxes and collectively build up their own retirement
funds.

The Great Depression, however, created an urgency
to provide relief instantly as unemployed workers
were forced to use their savings and retirees, who
saved for retirement, lost their assets in failed banks.
PAYGO

“Pay as you go” is a system in which the payroll
taxes of current workers are used to fund the
retirement benefits of current retirees.

Under PAYGO, employees and employers pay an
equal percentage of 6.2% tax on employee income,
with a cap of $106,800.

This system allowed transfer payments to be made
immediately from workers to retirees and made a
promise that the workers would receive the same
benefits when they retired.
Foreseen Problems

79 million babies were born in the U.S. during Baby
Boomer era (1946-64).

This “bubble” in births will cause the amount of
Social Security payments to exceed the taxes
collected upon their retirement.

This generation is expected to begin retirement in
2011.

If only some one had thought of a solution… 
Greenspan Commission, 1983

During the Reagan administration, Alan Greenspan
headed a group to solve the Baby Boomer/Social
Security problem.

They decided to raise the Social Security tax rate by
a small amount to build up a surplus in funds for
Baby Boomer retirees.

This trust fund now contains about $2 trillion… 

Once the trust fund is depleted, Social Security will
continue with the PAYGO system.
So, are we screwed?

No. There’s much talk about social security “running
out of money”. The people who think this have a
fundamental misunderstanding of how the PAYGO
Social Security system works.

While the trust fund will certainly be used up paying
benefits to retirees of the Baby Boomer era, and our
parents may have to retire later than 65 years of age,
the system will remain intact and revert to the pre1983 tax scheme.
Retirement Benefits in China
• In the United States, workers collectively support all retirees.
• The advantages of this method is that the old people do not have to
depend on their own children. Each old person is collectively supported by
the whole next generation in society. The children are freed from the
burden which they should take responsibility for their parents after their
retirement.
• The disadvantages of the method are that workers cannot pay their
benefit checks directly to their parents.
Analyzing the information just inside the United States may not lead to the
most objective conclusion we can make. Therefore, the condition that
China is facing may provide us a chance to overlook the social security
system of our own.
The social security system of China is totally different from that of United
States.
• First of all, the urban population is only 43% of total amount which means
over 750 million people still live in the rural areas. And people are still
excluded from the social security system due to several specific conditions.
a) The low productivity of farmers. Due to the great population base of
farmers and the geographic conditions, mechanized production is not
suitable under the current conditions. The real GDP per farmer is around
$500 per year which is under the threshold.
b) Self-sufficient is not included in the Chinese culture. Especially in the
rural areas, the farmer parents rely on their own children when they
grow old (there is no estimated retire age for farmers). This condition has
lasted for over two thousand years which cannot be easily removed.
Therefore, even in some rich villages, people refuse to join the social
security plan due to the fear of breaking family tie.
The Baby Boom
• The next problem is the baby boom. There are 3 severe baby boom period
in China after 1949 during the 1950s, late 1960s, and the 1980s. And the
total population is tripled after that.
• Then the one child policy was adopted in 1979 to reduce the birth rate
that people living in urban area can only have one child per couple and
two in the rural areas.
• Theoretically , a Chinese youth will have to support both his/her parents
and four grand parents under the age structure. This is the so called “4:2:1”
phenomenon that put tons of pressure on the young men and women.
• Within five years, the baby boomers of the 1950s will start to hit
retirement age. They are the beneficiaries of the baby boom, because
most of the families have over three children. But the next generation will
have to suffer the aging society before the social security system can cover
most of the citizens.
Other problems caused by inexperienced government
• One of most the unreasonable decisions made by the government is that
the enforced retiring age is 60 for male and 55 for female while the life
expectancy of male is 72.54 years and that of female is 76.77 years (2010
est.) Then the nine-year subsidy on women side may cause new
deadweight loss.
• Another serious issue is that the discrimination on farmers under the
current social security system causes thousands of young men and women
living in the villages come to the urban city for jobs and opportunities. The
problem is that this process is too fast and then almost all the cities are
over populated. There are not sufficient jobs for them which also makes
contribution to the high unemployment rate.
Conclusions
• Compared the situation U.S and China are facing, baby boom might be the
most important instability factor of the social security system. Even
though each generation self-sufficient is applied, people still have to suffer
from the deadweight loss caused by the rapid increase and future
decrease in the aggregate demand of pubic good such as education,
Medicare, tenement and so on.
• China may have to reconsider the one baby policy and pay more attention
to the potential middle class for the sake of a stable society structure.