Chapter 9- Social Insurance Social Security and Unemployment Insurance Public economics
1 Chapter 9 – Social Insurance I: Social Security and Unemployment Insurance Public Economics
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
2 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
Why have Social Insurance? Recall that the first welfare theorem concluded that private markets generally work well One critical difference in insurance markets is asymmetric information -one party has information that is not available to the other party
3 Why have Social Insurance? • Recall that the First Welfare Theorem concluded that private markets generally work well. • One critical difference in insurance markets is asymmetric information – one party has information that is not available to the other party
Why have Social Insurance? If a private firm offers insurance and cannot observe the high risks from the low risks, likely to get a group of buyers that is adverse to its interests Adverse selection- Individual who knows he is especially likely to collect benefits will have an especially high demand for insurance
4 Why have Social Insurance? • If a private firm offers insurance and cannot observe the high risks from the low risks, likely to get a group of buyers that is adverse to its interests. • Adverse selection – Individual who knows he is especially likely to collect benefits will have an especially high demand for insurance
Why have Social Insurance? In a perfectly competitive insurance market, expected profits will be driven down to sO Adverse selection could lead to insurance plans losing money, and raising the premiums only exacerbates the adverse selection problem
5 Why have Social Insurance? • In a perfectly competitive insurance market, expected profits will be driven down to $0. • Adverse selection could lead to insurance plans losing money, and raising the premiums only exacerbates the adverse selection problem