On health insurance--one interesting idea that is politically neutral is to make health insurance mandatory, like auto insurance (see Ted Halstead, "To Guarantee University Coverage, Require It" New York Times 1/31/2003)

Most people without health insurance are under 35. Forcing them to join the insurance risk pool would drive costs down for everyone (solving problem of adverse selection).

It would also improve quality and efficiency of care--because insurance would no longer be tied to jobs, and so people would not have to constantly change programs.

Problem: many individuals can't afford it--here's where textbook suggestion comes in--provide a subsidy/reimbursement of $4,000 to all families.

(Note--this is not my preferred strategy. I think a single-payer system like the Canadian system would be better because I don't think that the health insurance business is competitive--so called "choice" among plans doesn't yield many benefits because the plans are incredibly hard to compare, and companies have an incentive to confuse the picture; I would favor the kind of simplification a single-payer plan could provide)

On environmental regulation--you might be interested to know that this area ranks very low in air quality--especially ozone levels. This is because we are in pathways of air currents from Midwest power plants and the urban air pollution of New York, New Haven, and Hartford.

Key Concepts:

Types of "Goods" (and services)

private goods --like doughnuts or hamburgers--when you eat one, that means there's one less for someone else. Also, you generally can't get one unless you pay for one.

THESE ARE THE ONLY TYPES OF GOODS FOR WHICH THE LOGIC OF SUPPLY AND DEMAND WORKS IN THE TEXTBOOK SENSE--AND IN THIS CASE ONLY IF THERE ARE NO EXTERNALITIES

nonrival goods --your consumption does not reduce someone else's consumption. Eg. television programs or the Internet, or military spending--everyone in reach of the broadcast or hooked onto the internet or living in the country doing the military spending tends to benefit. Often this is a matter of degree--up to a point, for instance, a highway is a nonrival good. In a traffic jam, it becomes a rival good.

KNOWLEDGE AND TECHNOLOGY (EXCEPT FOR TOP SECRET FORMS) ARE NONRIVAL GOODS!

nonexcludable goods --these are goods it's hard to charge money for so people will tend to get them whether they pay for them or not. A highway is a nonexcludable good unless it is a toll road. Clean air (at least so far) is a nonexcludable good. Peace is a nonexcludable good, as is war. Music that is dowloadable over the Internet in MP3 form is a nonexcludable good (though record companies try as hard as possible to make it excludable).

MARKETS DON'T WORK EFFICIENTLY FOR NONRIVAL OR NONEXCLUDABLE GOODS. PERIOD.

THIS IS ONE BIG REASON WHY WE HAVE A PUBLIC SECTOR.

progressive taxes--the percentage paid goes up along with income, as with federal and state income taxes. The estate tax was an example--only those with estates of more than a million were even covered by it--less than 2% of the richest households.

regressive taxes--the percentage paid goes down along with income, as with Social Security taxes (only the first $70,000, about, of earnings is taxed) or with a sales tax. Any sales tax is regressive because those with low income spend all their income plus whatever they can borrow to consume, while those with high income money tend to save and invest. A sales tax does not take a bite out of savings and investment

proportional taxes --the overall percentage of income paid is constant. In the U.S. the effects of the taxes described above largely cancel out, resulting in taxation that is roughly proportional overall--but recent policies are moving us in a regressive direction.

"Log-rolling" and "rent-seeking" -- ways in which money wields political influence, basically buying votes for projects that benefit constituents (log-rolling) and directly benefits those who donate money...

This is the impetus behind campaign finance reform. The rule of democracy is one person, one vote, not one dollar, one vote

My favorite current example of "rent-seeking" (a.k.a. corruption) the Massachusetts Legislature just confirmed a more than $3 million dollar tax break for greyhound racing.

Assignment 8: Due by Friday, May 9.

From Ch. 14, #1, #2.

OR, IF YOU LIKE, YOU CAN SUBSTITUTE # 6 FOR ONE OF THESE.

Ch. 14, # 1.

A hydro generator can supply up to 100 units of power/day at a constant marginal cost of 1 cent/unit

A steam generator can supply any additional power at a constant marginal cost of 10 cents per unit.

When electricity costs 10 cents per unit, residents demand 200 units per day.

Draw the marginal cost curve--hint: it will look like a stair step.

If people demand 200 at a price of 10 cents, they would demand at least as much (probably more) at a lower price. The city should charge the marginal cost.

Ch. 14, #2

water from a spring costs 2 cents per hundred-gallons and has a capacity of 1 million gallons per day, or 10,000 hundred-gallons a day

water from a lake costs 4 cents per hundred-gallons and is unlimited

demand curves are given (solve for the quantity demanded at a price equal to the marginal cost). Might also be helpful to draw a graph.

Ch. 15., #6

Demand curves for Jerry Springer and Masterpiece Theater are shown.

A television network is considering whether to add one or both programs.

Colgate is the potential sponsor and will pay 10 cents for each viewer (based on telephone survey)

12 million people would view Springer; only 8 million would view Masterpiece theater

(you can read this off the demand curves shown--note that price is 0)

either show costs $400,000 to produce

Another alternative to fill a slot is an infomercial for a weight-loss program, which costs the network nothing and pays them $500,000.

What combination will the network choose?

Answer--the two that are most profitable.

How does this affect consumers?

Answer: calculate the "consumer's surplus" for each alternative--the area under the demand curve, a triangle (area=1/2 base times height). The surplus for the infomercial is stated in the text.

Short thought piece: describe a situation in which you have been forced to deal with a free rider problem.

State Senator Stan Rosenberg on the drunken riots of this week:

"The very life of the university is at stake, and the last thing the Legislature needs to see is a group of UMass students behaving like stereotypical soccer hooligans. Most UMass students are decent, hard-working and are struggling to earn their degrees," Rosenberg added. "Their futures are under threat. That's what the Legislature needs to know as it debates the university's budget. Instead, the Legislature saw the university and its student body in the ugliest light imaginable."
("UMass ponders punishment," Daily Hampshire Gazette, May 6, 2003)