Question

1. (1 point) Transfer programs.

a.) (.5 points) List one social insurance and one public assistance transfer program.

b.) (.5 points) What is the difference between social insurance and public assistance programs?

2. (1 point) Please be succinct and to the point. Explain the two characteristics of public goods.

Explain why public goods are subject to the “free rider problem.”

3. (1 point) What is an “externality?” Provide an example of a good with a negative externality. Also,

provide an example of a good with a positive externality.

Answer 1

1. Transfer programs- Transfer programs, commonly called welfare, are government programs that seek to provide aid to certain classes of individuals who are poor. Not everyone is eligible for public assistance, even if they meet the poverty requirement. This is because the traditional philosophical view of American public assistance is that it should be provided only to the deserving: those people who are not responsible for their own poverty, such as children, the aged, and disabled. Fit, working-aged adults without children tend to be out of luck and deemed undeserving of most public assistance.

A transfer payment is a one-way payment to a person who has given or exchanged no money, good, or service for it. (In economics, a payment is the transfer of one form of good, service or financial asset in exchange for another form of good, service or financial asset in proportions that have been previously agreed upon by all parties involved.) It is a process used by governments as a way to redistribute money through programs such as old age or disability pensions, student grants, and unemployment compensation.

2. Social Insurance- Social insurance consists of contributory schemes, managed by governments, which provide financial support to participating individuals in times of hardship. In countries where social insurance schemes exist, contributions are generally compulsory (e.g. unemployment benefits, national insurance). There are few examples of social insurance schemes in low income countries. • Social transfers are non-contributory (in the sense that the recipient is not required to pay for them through premiums or specific taxes) social assistance provided by public and civic bodies to those living in poverty.

The federal government's social insurance programs are authorized pursuant to the Social Security Act of 1935, as amended. Programs include Old Age, Survivors, and Disability Insurance (OASDI); Medicare; and unemployment insurance. The programs are often collectively referred to as the Social Security program

Public assistance transfer program- One can break public assistance down into two categories: cash and in-kind assistance. Cash assistance is the transfer of money from a government-funded program to an individual, such as a welfare check. In-kind assistance, on the other hand, is the transfer of a benefit to a recipient not involving cash. Food Stamps and health care are examples of in-kind benefits.

Federal Cash Assistance Programs

The three primary cash assistance programs provided by the federal government are:

• Temporary Assistance for Needy Families (TANF)
• Supplemental Security Income (SSI)
• The Earned Income Credit (EIC)

b.

Welfare and Social Security are different financial programs designed to provide financial income to their recipients. All U.S. workers who have paid Social Security taxes over a life time may receive Social Security retirement or survivors' benefits. This has nothing to do with welfare, as you are simply being paid out by a fund that you paid into during your working years.

In comparison, residents of each state in urgent financial need or who are disabled, elderly, or blind may apply for welfare benefits. Other U.S. workers may apply for disability benefits when a serious illness prevents them from gainful employment for at least one year. Applying for Social Security disability benefits is not a guarantee that the claimant will receive approval.

Social security is often confused with welfare because the Social Security Administration also oversees a program for needy or disabled Americans. Social Security's Supplemental Security Income (SSI) program provides public assistance to U.S. workers and their families in need.

Low-income families who are struggling to find employment to pay for life's essentials, such as housing and nutritious food, may receive welfare or SSI benefits. Some people may be eligible for welfare but not SSI, or vice versa. Others may be eligible for both under certain conditions.

2. The first characteristic, that a public good is nonexcludable, means that it is costly or impossible to exclude someone from using the good. If Larry buys a private good like a piece of pizza, then he can exclude others, like Lorna, from eating that pizza. However, if national defense is being provided, then it includes everyone. Even if you strongly disagree with America’s defense policies or with the level of defense spending, the national defense still protects you. You cannot choose to be unprotected, and national defense cannot protect everyone else and exclude you.

The second main characteristic of a public good—that it is nonrivalrous—means that when one person uses the public good, another can also use it. With a private good like pizza, if Max is eating the pizza, then Michelle cannot also eat it it—the two people are rivals in consumption. With a public good like national defense, Max’s consumption of national defense does not reduce the amount left for Michelle, so they are nonrivalrous in this area.

A public good has a classic free rider problem because public goods have two characteristics:

1. Non-excludability – you can’t stop anyone from consuming good
2. Non-rivalry – benefiting from good or service does not reduce the amount available to others.

Therefore, public goods like national defence, street lighting, beautiful gardens may not be provided in a free market.

A free rider problem is also said to occur when there is overconsumption of shared resources. – This is also known as The Tragedy of the Commons. For example, a fisherman may take a high catch and free ride on other fishermen who are more concerned to preserve sustainable fish stocks.

3. An externality is an economic term referring to a cost or benefit incurred or received by a third party. However, the third party has no control over the creation of that cost or benefit. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.

When certain goods are consumed, such as demerit goods, negative effects can arise on third parties. Common example include cigarette smoking, which can create passive smoking, drinking excessive alcohol, which can spoil a night out for others, and noise pollution.

A positive externality exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction. For example, education directly benefits the individual and also provides benefits to society as a whole through the provision of more informed and productive citizens