Introduction Are people unaffected by tax increase if they pay zero in taxes afterwards? No, consumption may have changed in response to the tax increase Bundle consumed is less desirable Excess burden is a loss of welfare above and beyond the tax revenues collected

Introduction Many policies center around whether the tax burden is distributed fairly. Not as simple as analyzing how much in taxes each person actually paid, because of tax-induced changes to price

Introduction Cost-benefit analysis is a set of practical procedures for guiding public expenditure decisions

What's Special About Health Care? Health care costs are large and growing fast Number of reasons why First Welfare Theorem may be violated Poor information(physician induced demand) Adverse selection and moral hazard Disease externalities

Social Insurance Programs Generally share 4 characteristics: Participation is mandatory Eligibility and benefits depend on prior contributions Benefits begin with an identifiable occurrence Programs are not means-tested

Quick Look at Welfare Spending .\Welfare\ in the United States is a patchwork of dozens of different programs. All welfare programs are means-tested-- only individuals with sufficiently low income are eligible. Programs often have other requirements related to family structure and assets

Introduction Will provide framework for thinking about the normative and positive aspects of government income redistribution policy

Political Economy Defined Political Economy is the application of economic principles to the analysis of political decision making. -elf- -interestin- the marketplace, this often leads to efficiency; different implications in \political market. Maximization-one goal may be to maximize social welfare

Externality Defined An externality is present when the activity of one entity(person or firm)directly affects the welfare of another entity in a way that is outside the market mechanism. Negative externality: These activities impose damages on others. Positive externality: These activities benefits on others

Public Goods Defined Pure public goods share two characteristics Nonrival Cost of another person consuming the good is zero Nonexcludable-Very expensive to prevent others from consuming the good