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[...] Public Finance ECON 3440 Public Finance Fall 2024 1. Determine if the following statements are true, false, or uncertain, and briefly explain why: A. An increase in the U.S. Social Security system's Full Retirement Age (FRA) is equivalent to a cut in Social Security benefits. True: The FRA is the age at which individuals are entitled to full retirement benefits, an increase in the FRA means that pool of eligible people will face a larger reduction if they claim benefits before the new FRA and those whom delay claiming benefits after the FRA period will have an upward limit of these benefits reduced by a greater proportion. [...]
[...] Using the U.S. Office of Management and Budget (OMB)'s recommendation for choice of a discount rate, determine whether you would recommend that the project be approved. Note: I would like you to do any calculations needed to answer the question on this assignment but will not expect you to do calculations requiring use of a calculator on the final exam. Benefits Inflation Rate Duration Cost Discount Rate $10,000 4 $39,000 (according to Week 8 course) In order to calculate the nominal discount rate, we'll use the following formula: 1 + NDR = 1 + NDR = + 0.02)(1 + 0.05) NDR = Year Benefit (Inflation Rate) $10,000 1 $10,500 2 $11,025 3 $11,576 Using the discount rate, the present value will be calculated using the following formula: PV = Year PV $10,000 1 $9,813 2 $9,627 3 $9,451 TOTAL $38,891 Present discounted value of total benefits from the project = $38,891.21, which is less than the cost of the project - $39,000. [...]
[...] Briefly describe how asymmetric information leads to the problem of adverse selection. Individual members have better knowledge on their health risks compared to the insurers. This asymmetric information leads to adverse selection, where people at higher risk for health issues are more attracted to by health insurance while healthier persons may decide to forgo coverage as the premiums for coverage do not correlate with their lower risk. Higher premiums make it even less appealing for low-risk people to purchase insurance, resulting in a vicious cycle of increasing premiums and smaller insurance pools. [...]
[...] Programs such as Medicaid and Medicare guarantee access for at-risk groups and foster equity by mitigating gaps in care. This potential for positive externalities, for example vaccination and preventive health care, also provides a justification for intervention to enhance social welfare. Moreover, the government plays a significant role and it can negotiate prices, limit administrative costs and finding a way to make cost-saving measures more efficient in the healthcare system. In essence, such initiatives not only mitigate structural inefficiencies but also promote universal access, equity, and welfare of our society. [...]
[...] Insurers might additionally adjust premiums according to risk profiles, and consequently, high-risk individuals would pay more than low-risk and vice versa. That would likely bring stability to insurance markets. Health status frequently depends on factors some individuals cannot control, so pricing insurance according to risk can be viewed as inequitable. D. What rationale might there be for government involvement in health insurance beyond addressing the adverse selection problem? The government intervention into health insurance markets isn't just about adverse selection - it's about market failures, equity, and public health objectives. [...]
