Economics & Public Policies - Essay Example

?Essay – Economics & Public Policies Table of Contents Answer Production Possibility Curve 3 Answer 2: Lindahl Equilibrium 4 Answer 3: Pollution Abatement 5 Answer 4: Break-Even Analysis 6 Answer 5: Cost-Benefit Analysis of New Road 7 Answer 6: Dependency Ratio 8 Answer 7: Effective MTR 9 Comparative Analysis of U.S.-Canada Social Security System 9 Introduction- U.S. Social Security System 9 Introduction- Canadian Social Security System 10 Comparison of the Systems 11 Contrast of the Systems 11 Evaluation of current U.S. System against Canada 11 Recommendations 12 References 13 Answer 1: Production Possibility Curve The production possibilities curve represents the total output of the combination of two products in an economy provided the inputs and technology are available. There are 3 basic assumptions underlying the production possibilities curve: 1. Quantity and quality of all resources as inputs fixed 2. Unchanged technology 3. Fully employed resources If the federal state and local governments in the U.S. engage in increased health-related expenditure, they would require increasing taxes to meet the increased costs. Assuming the fixed quantity of resources, i.e. public taxes and technology over a given time period, the U.S. is capable of providing limited amount of public health care services. This also depends upon how much the taxpayers are willing to sacrifice other goods and services for increased public health service. The production possibilities curve shows that increase in health care services will lead to less of other government public services due to its limited resources. Therefore, the production of other goods and services will be less. As the quantity of health care services is reduced, the government will be able to provide more of other goods and services. The probable production possibilities curve is provided in figure 1. Figure 1: Production Possibilities Curve of Health Care Service by Government Source: (Brux, 2010, p.185) Answer 2: Lindahl Equilibrium When each member of the community makes a voluntary contribution towards per unit of a pure public good, that contribution equals to his/her marginal benefit derived from the public good at efficient level of output. This equilibrium contribution per unit is known as Lindahl price. The Lindahl prices are assigned in such a manner that no budget deficit or surplus arise at the efficient output of the good. Lindahl equilibrium requires that the total contribution by the community towards the public good is equal to the Marginal Social Benefit and total cost of producing that public good (Hyman, 2010, p.165). This means that ?Ti*Q = MC*Q = AC*Q Where Ti is the voluntary contribution by each individual; Q is the efficient output; MC is the Marginal Cost of pure public good; AC is the Average Cost of pure public good; Therefore, the total contribution or revenue collected will be (?Ti*Q) and it should be equal to the total cost of the production, i.e. AC*Q. MC*Q equal to AC*Q implies there is no budget surplus or deficit. However, assuming that marginal cost of pure public good increases if more is purchased by the community, i.e. MC>AC then ?MBi>AC because MC = ?MBi. Therefore, the sum of per unit voluntary contribution becomes more than the average costs of production and so this will result in budget surplus at the efficient annual output. Answer 3: Pollution Abatement There are very few human activities that do not pollute the environment, and it has become imperative to address the global concerns over the environmental degradation. The objective of a hundred percent pollution abatement cannot be achieved because the regulators do not have the information of the pollution’s marginal external costs and marginal costs of abatement (Grafton, 2004, p.63). Therefore, most of the pollution abatement policies aim to ensure that the pollution control methods are cost-effective. The costs of pollution abatement not only consider the marginal social costs, but also the opportunity costs associated with cleaner environment. Therefore, the optimal pollution abatement requires the marginal benefits of the abatement to be equal to marginal costs. The efficient amount of pollution abatement requires the following information: 1. Accurate amount of emissions. 2. The marginal social damage caused by each unit of the pollutant. 3. Differences in the margin external costs and marginal social benefit among the regions and firms. Overall, it is very difficult to ascertain the efficient level of pollution abatement. This is mainly due to differing margin external costs and margin social benefits among the firms. Another reason of this is the presence of unregulated markets where the abatement is usually very low. In many markets the costs of pollution abatement are more than the benefits derived. Answer 4: Break-Even Analysis Figure 2: Break-even Level of Income When the family’s earnings are zero, it is receiving income guarantee of $12,000 (T). As the income (I) increases, T decreases at the rate of 25%. Disposable income (D) is the total income including earnings and guarantee. The break-even level of income is $48,000 where the family of four stops receiving the guaranteed income from government and above this level it starts paying the taxes at the rate of 25% (figure 2). Here for every $4 increase in income the transfer income will phase out by $1. In figure 3, the taxes are paid by the family above the income of $48,000. This means that all the families with income below $48,000 will be transfer recipients which are likely to be the huge portion of the total population. The higher the break-even level of income, the lower the number of families that will pay taxes. The $1 for every $4 of increase in income is a very low phase out rate which entails that this plan is going to be very expensive for the government. The tax rates on families earning more than $48,000 should be higher so as to be able to finance the transfers. Figure 3: Taxes under Income Guarantee Scheme of Government Answer 5: Cost-Benefit Analysis of New Road The annual benefits to the motorists from the new road to be constructed between Raleigh and Morehead city depends upon the incremental benefits that will accrue to the motorists considering the construction costs and their willingness to pay. The road is estimated to reduce the costs per trip from $5 to $4 and increase the annual number of trips from 500,000 to 600,000 (figure 4). The total incremental benefits from cost savings and increased number of trips per year are $4 * 600,000 - $5 * 500,000 = - $100,000. There will be savings of $100,000 per year. The cost of the new road will include the materials, labor, land costs, as well as the maintenance costs. Other costs include the accidental costs, losses from slow down and congestion, and external costs like pollution. Considering all these costs and the benefits that are likely to accrue will determine the true benefits to the motorists. Figure 4 Answer 6: Dependency Ratio The dependency ratio is the ratio of economically unproductive (children and old people) to the economically productive (working population). When the old people are compared to the productive group, it is known as old-age dependency ratio (McKenzie, Pinger & Kotecki, 2011, p.249). There are currently 50 million Social Security pension recipients and 150 million working population. Therefore, the old-age dependency ratio is 33.34%. Furthermore, the average annual Social Security Benefits are $12,000 and average annual taxable wage per worker is $25,000. Assuming that every productive member supports the nonproductive age group people, it is clear that the taxable wages are not enough to pay for the social security benefits to old people. The government has to either increase the tax rates or reduce the support services to the elders. Answer 7: Effective MTR The effective MTR is the person’s total marginal tax rate, including the federal marginal tax, state income tax rate and social security taxes (Garman & Forgue, 2009, p.108). The worker’s marginal tax rate is 9%, and he comes under the 31% federal tax bracket. He pays 7.65% social security tax. Then the effective marginal tax rate would be 47.65% (31% + 9% + 7.65%). Comparative Analysis of U.S.-Canada Social Security System Introduction- U.S. Social Security System There are presently 155 million working people in U.S. who pay for the monthly social security benefits of 54 million people. The majority of the Social Security beneficiaries are retirees and their families whose count is approximately 36 million (SSA, 2011). The taxes collected from the working people are used to pay benefits for retired people, disabled people, survivors of deceased workers, and dependents of beneficiaries. The current threshold limit on earnings for Social Security taxes in 2011 was $106,800 and this amount keeps changing with the changing level of wages. 85% of the Social Security tax is kept in a trust fund from which the monthly benefits to the present retirees and their families along with the dependents of the deceased workers are paid. The other 15% are used to pay disabled people and their families. By Federal Law, the trustees of this trust fund prepare an annual public report projecting the financial status of the fund for the next 75 years. The underlying assumptions in these projections depend on the wage growth, economic growth, inflation, fertility, immigration, unemployment, and mortality. If the economic growth is more than the projected, the Social Security revenues increase, otherwise the trust fund faces the funding problems (Bessette et al, 2011, p.541). Introduction- Canadian Social Security System The benefits under the Canadian Old Age Security program include the Old Age Security pension, allowance, guaranteed income supplement and allowance for the survivor. Since the Old Age Security Act was introduced in 1952, there have been numerous changes such as the eligibility age from 70 to 65 years, spouse’ allowance, Guaranteed income Supplement, retroactive benefits, quarterly indexation etc. These benefits are funded by tax revenues of Government of Canada. Service Canada under HRSDC administers the program through regional offices. The benefits payable are adjusted quarterly for increase in the cost of living as per the CPI. In order to be eligible for the benefits under Old Age Security Pension, a person has to be over 65 years and must have spent the stipulated years in Canada after turning 18. His/her employment history and retirement status are not considered. The benefits are determined on the basis of number of years spent in Canada. The monthly Guaranteed Income Supplements are paid to those who receive the full or partial Old Age Security Pension and have little or no other income source. The allowance is designed for survivors in difficult circumstances and couples living on pension of single person (Service Canada, 2011). There are various eligibility conditions for Guaranteed Income Supplements and allowance. Comparison of the Systems The major similarity of the two systems is that both recognize the old age people aged over 65 years, dependents of the deceased, survivors, and disabled people to be eligible for the benefits. These benefits are funded by the tax revenues in both the countries. Both the systems have undergone numerous changes in order to make them more accessible to the needed people within reasonableness. Contrast of the Systems The U.S. Social Security system differs from the Canadian Old Age Security system with respect to the eligibility conditions and administration of the tax revenues to pay the benefits. Eligibility in U.S. is decided by the age, employment status and income level, whereas in Canada the eligibility is decided by the number of years of stay in Canada by the recipient of the benefits. The benefits in the U.S. are administered through the trust fund and the projected status of the fund. The taxes are decided by the wage levels. HRSDC in Canada on behalf of the government takes care of the benefits which are indexed quarterly to consider the changing costs of living. Evaluation of current U.S. System against Canada The comparison and contrast of U.S. social security system with that of Canada’s show that the U.S. presently has a vulnerable social security system because of the risk of funding deficit in the trust fund. The annual projections made by the trustees for the coming 75 years can be meaningless because of the fast changing U.S. economic conditions and demographics. The young working age population may not earn sufficient so as to be able to pay for the benefits of the retirees. On the other hand, Canada quarterly indexes the benefit payments. Recommendations The U.S. should adopt more reasonable conditions to become eligible for the Social Security benefits. If there is increasing unemployment, the government will not be able to pay for the benefits. Increasing taxes is not a plausible solution to make the Social Security system better because it will put the already burdened public in severe conditions. Government should find ways to improve the employment conditions through economic growth. It should carefully analyze its public expenditure to identify those projects which have high marginal social benefits as compared to the costs. References Bessette, J.M. et al. (2011). American Government and Politics: Deliberation, Democracy and Citizenship, Texas Edition. Cengage Learning. Brux, J.M. (2010). Economic Issues & Policy [With Access Code] 7th ed. Cengage Learning. Garman, E.T. & Forgue, R. (2009). Personal Finance 10th ed. Cengage Learning. Grafton, R.Q. (2004). The economics of the environment and natural resources. Wiley-Blackwell. Hyman, D.N. (2010). Public Finance: A Contemporary Application of Theory to Policy [With Access Code] 10th ed. Cengage Learning. McKenzie, J.F. Pinger, R.R. & Kotecki, J.E. (2011). An Introduction to Community Health 7th ed. Jones & Bartlett Publishers. Service Canada. (2011). Overview of the Old Age Security Program. Retrieved on January 23, 2012 from http://www.servicecanada.gc.ca/eng/isp/oas/oasoverview.shtml. SSA. (2011). Social Security Publications. Retrieved on January 23, 2012 from http://www.ssa.gov/pubs/10024.html. Read More