1. Principles of Microeconomics
Welcome to Day 23
Principles of Microeconomics

2. What we learned last class. 1. Positive externalities. 2. Public goods
What we learned last class. 1. Positive externalities. 2. Public goods. 3. Tragedy of the commons.

3. Chapter 16 Information and Insurance (and Gambling)

4. Sometimes we have to make decisions without knowing everything we want to know Does this person I am buying this used car know something I don’t? Am I going to get sick next month and miss work?

5. Let’s say that I know my used car I am selling is good, but buyers are skeptical because so many used car sellers are selling junk. What can I do to convince the buyer and get a good price?

6. 1) Third party inspection. 2) Money back guarantee or warranty
1) Third party inspection. 2) Money back guarantee or warranty. 3) Good reputation. 4) Long-term service contract.

7. How do I know my doctor (or economics teacher) knows what he is doing
How do I know my doctor (or economics teacher) knows what he is doing? License or education requirements, perhaps. How do I know the job applicant I am considering hiring is willing to learn?

8. A signal in economics is when one person does something (other than directly telling them) that gives information to another person about a characteristic of the first person. Often there is a cost to the signal.

9. That good warranty is a signal
That good warranty is a signal. But how do you signal a potential employee that you are able to learn what he wants to teach you and are willing to whatever he asks, no matter how pointless it seems to you?

10. Well, what are we doing here?

11. The signaling theory of education School is more about demonstrating you can learn that what you do learn.

12. How can you signal to a potential dating partner that you could be a “good catch.”

13. Is there anything more useless than a diamond ring
Is there anything more useless than a diamond ring? Maybe that’s the point.

14. What does the cost of our Christmas gifts to those in our life say to them about how much we value them?

15. Why buy insurance, knowing that you are likely to lose money?

16. Remember this? st Donut 2nd rd th Marginal 10 utils 8 utils 3 utils utils Utility Total 10 utils 18 utils 21 utils 20 utils Utility If the donuts are free, how many donuts would you take?

17. So, everyday you stop at the donut shop, and the owner, who has a crush on you, let’s you take as many free donuts as you like. How many would you take?

18. But half the time, there are two aggressive dogs that steal two of the donuts when you leave the shop. These days you only end up with one donut.

19. There is a man who is always leaning against the building across the street watching this. One day he offers you donut insurance. On the days the dogs do not bother you, you pay him one of the 3 donuts. On the days they do, he pays you one donut. Should you take this offer?

20. Of course, the question is – what does he get out of this
Of course, the question is – what does he get out of this? Suppose on the days he pays you, he gives you a donut a little smaller than the donut you give him on the good days. The donut he gives you is only worth 7 utils. Should you still take the bet?

21. Of course this is an unrealistic story, but it is a good representation of what insurance is about. Usually, it is dollars, not donuts, and car accidents or house fires (or death), not thieving dogs. Also it is Progressive Insurance, not some guy in the street.

22. We have a homework assignment on this, but first let’s talk about Obamacare. You’ve probably heard of it, but I wouldn’t blame you if you didn’t know that it is.

23. There are people without health insurance
There are people without health insurance. They can’t afford expensive care if they get sick. They either are taking the chance they won’t or can’t afford insurance (in their judgment).

24. What do we, as a society, do if they get sick?

25. Lots of countries have government run health care. We do not
Lots of countries have government run health care. We do not. We have a private market system.

26. We do have a law that emergency rooms at hospitals can not turn people away if they can not pay.

27. So the logic of Obamacare is to make people buy health insurance (the mandate) so they can pay for their own care. But some people can’t afford it, so there are subsidies.

28. Basics of Obamacare 1) If you don’t have health insurance, you have to pay a fine. 2) Subsidies for low income people. 3) Insurance companies have to take people with pre-existing conditions.

29. Can the government force people to buy health insurance
Can the government force people to buy health insurance? The Supreme Court and fees versus taxes.

30. The law lets the president set dates and levels of subsidies
The law lets the president set dates and levels of subsidies. That’s a bit of an issue right now.

31. Do the homework.

32. What we learned today. 1. Signaling. 2. Insurance. 3. Obamacare

33. Principles of Microeconomics
Welcome to Day 24
Principles of Microeconomics

34. What we learned last class. 1. Signaling. 2. Insurance. 3. Obamacare

35. Go over the homework

36. A few last issues with insurance. 1) Moral Hazard. 2) Self-insurance
A few last issues with insurance. 1) Moral Hazard. 2) Self-insurance. 3) Gambling.

37. Moral Hazard is when people engage in riskier behavior when they have insurance.

38. Why lock your bike if you have insurance?

39. Self-Insurance is making periodic deposits in their own account to pay for a possible event.

40. This way you get to keep the money if the event never happens
This way you get to keep the money if the event never happens. So what’s the problem?

41. Gambling is the opposite of insurance
Gambling is the opposite of insurance. Insurance smooths your income and gambling makes it more extreme. Would the same person who buys car insurance go to Las Vegas? If he wants to gamble, why doesn’t he just no insure his car?

42. Chapter 14 Poverty and Inequality

43. Why do some people have higher incomes?

44. 1) Education 2) Natural ability 3) Inheritance 4) Family structure 5) Discrimination 6) Luck

45. The “conservative” solution to poverty 1. Stay in school. 2. Get a job
The “conservative” solution to poverty 1. Stay in school. 2. Get a job. 3. Get married. 4. Don’t have kids until you are married.

46. The “liberal” solution to poverty More generous welfare.

47. What is the poverty? The poverty line (2015) – $11,790 (one person) $25,240 (family of four)

48. How much would it cost to lift everyone to the poverty line
How much would it cost to lift everyone to the poverty line? 15% of the population, 46.5 million people were $175.3 billion below the poverty line in Why not just pay everyone who is below the poverty line enough to bring them up to the poverty line?

49. This problem is what your textbook calls the poverty trap
This problem is what your textbook calls the poverty trap. The poverty trap is the situation where a person earning additional income loses substantial government benefits so their net income rises little.

50. What we learned today. 1. Moral hazard and self-insurance. 2
What we learned today. 1. Moral hazard and self-insurance. 2. The economics of gambling. 3. Reasons for inequality. 4. The poverty line and the poverty trap.

51. Principles of Microeconomics
Welcome to Day 25
Principles of Microeconomics

52. What we learned last class. 1. Moral hazard and self-insurance. 2
What we learned last class. 1. Moral hazard and self-insurance. 2. The economics of gambling. 3. Reasons for inequality. 4. The poverty line and the poverty trap.