1. Also referred as the invisible hand theorem, it holds that any competitive equilibrium results to a Pareto efficiency in resource allocation. Pareto efficiency is achieved when there is no further room for improvement, meaning that it is at optimum efficiency level. The central idea in the First Fundamental Theorem is that markets can create a situation of social optimum in which no government intervention is required. Under such circumstances, the government should implement leissez faire policies. However, proponents of government regulations hold that the assumptions required to achieve this theorem are not achievable in real life situations. Notably, a situation where a single economic player holds all the goods at the expense of the rest exemplifies Pareto efficiency but is not a perfect situation under welfare economics.
2. This is an example of welfare program implemented by the government to assist needy families towards attaining self-sufficiency. By assisting the needy families, the program confers third party benefits by helping the children in such families to live a better life. They also reduce the level of dependency by promoting job preparation and enhancing family stability. This confers economic benefits to the society.
3. Medicare is a social insurance program by the Federal government. Its importance is to help certain groups of persons to access medical insurance. The program targets people aged above sixty-five years and young people with disabilities or those with terminal kidney conditions or sclerosis. By assisting people to cover their medical costs, the program result to economic gains as it reduces the cost burden on the society. Overall, the Medicare program confers benefits to the public.
4. The dependency ratio refers to the age-population ratio of the persons who are not part of the labor market (dependants) in relation to those in the labor market (productive). This ratio is important in welfare economics in the sense that an increase in the ratio leads to increased burden on the productive portion of the population. For this reason, the productive population will be under pressure to meet the needs and social security needs of the other part, which is economically dependent. This causes a direct effect on social security as well as other indirect costs.
5. Selection of insurance policy has risks that are based on sorting of the existing plans. Because of this, it possible that the choice made may lead to loss of money. The resultant adverse selection risk will induce losses to the insured. Getting wrong plan allocation will lead to efficiency loss, the risks associated with sharing of the losses leads to increase in premium variability. There are also losses that occur when the insurer distorts its policies so as to have an improved mix of its insured. Subsiding premium on some relational basis may also affect the choices made.
1. This program qualifies as a public good because its consumption and utilization are characterized by non-excludability as well as and non-rivalry. Access to education by the poor students will not lead to exclusion of those who come from rich background, nor rival their consumption. The university’s project for assisting kids from underprivileged backgrounds to become socially and economically qualifies as a public good because it confers benefits to third parties.
It is an example of a positive externality for the state government. The third parties in this case are the poor kids who would otherwise find it difficult to access education. While the project has some cost to the taxpayers, it generates significant external benefits by reducing the amount of tuition paid by the poor kids to acquire education. This results to several economic benefits. First, it is in the best interest of the public if the kids acquire education, as they are likely to enhance their lifetime earnings. In this way, the project will contribute positively towards reducing poverty in the society. Besides, the financial aid project helps the government to adjust the private demand in order to make it consistent with the social demand. The public will ultimately benefit from improved social and economic society status.
2. The education program focuses on graduates as the output. However, problem of externality arise. This intervention is based on the argument that the free market is not able to offer this public good and handle its externalities. Externality problem occur because the actions of the governed will affect the well-being of the gasoline users. The economic issue arises because the relevant cost as well as the benefits associated with the program is not mirrored in the market prices. The output from the subsidized tuition generates a positive externality to the society. A positive externality exists when a third party who cannot be charged benefits from the transaction. The benefits accrued by the third party provide the necessary incentive to supply the chargeable parties. In this case, the chargeable parties are the taxpayers while the poor kids and the public cannot be charged. The government’s role in the economic system is to implement economic policies in order to facilitate positive externalities. The government can promote externalities by increasing supply for goods or demand. In this case, the positive externalities have been achieved through university subsidies. The net effect of the subsidies is increased demand for commodities. This externality occurs through reduction in the amount paid by consumers for goods. For instance, subsidizing university tuition encourages more poor students to access university education. This generates a positive externality for the future society…
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