public finace test

public finace test - Brian Acker Jack Ochs Public Finance...

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Brian Acker Jack Ochs Public Finance Examination 2 Question 1 A. A social risk could be described as a series of adverse events that occur to large numbers of people in the same pool that cannot be insured against by a private pool. Private risks are when the probability of some members of the pool making claims is independent of the probability of other members of the pool also making claims. Only private and independent risks can be pooled. B. Private companies can't insure against social risks because they do not have the ability to charge future generations of people for the loss that they take from a catastrophic loss, like the government can. An event like the great depression can not be covered by a private insurance company because they do not have many different, and future, generations in their insurance pool like the government does. The disparity is created by the potential differences between the levels of consumption and standard of living. A private company can't charge a future generation to pay out to the current generation. C. Adverse selection is the fact that insured individuals know more about their risk level than does the insurer might cause those most likely to have the adverse outcome to select insurance, leading insurers to lose money if they offer insurance. D. In order for private insurance companies to lessen adverse selection they try to reduce exposure to large claims by limiting coverage or raising premiums. E. First, the government could have everyone buy full insurance at some average price of say $825 per year which would lead to and efficient outcome and have both types of pedestrians have full insurance. Another option would be to have public provision. In this case the government would just provide full insurance to both types of consumers, so that all consumers would have the optimal full insurance. The government could also offer subsidies toward the purchase of private insurance and try to induce the optimal full coverage insurance. F. In order to reduce the problems of moral hazard, a company will usually have a somewhat high deductible. A deductible is an amount of money that an individual will have to pay before the insurance company starts to pay. If a medical procedure costs $2000 and an individual has a $300 deductible, then the person will have to pay for the first $300 and then the insurance company will pay the remaining $1700. The high deductible helps to prevent moral
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hazard because the person will most likely engage in less risky activities in which he could injure himself and have to pay the high deductible. G. The problem is that there are many other ways that an individual can make do without having to receive unemployment insurance. A person usually has some sort of savings so they can draw from that. They can also borrow from collateralized forms like borrowing against the equity they have in their homes or in uncollateralized forms that can use credit cards. An individual can also depend on other family members to increase there labor earnings and they can
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This note was uploaded on 04/07/2008 for the course HIST 1086 taught by Professor Ruch during the Spring '08 term at Pittsburgh.

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public finace test - Brian Acker Jack Ochs Public Finance...

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