today's kind of an econ heavy lecture this is what I like to think of as the preamble to our actual coverage of social insurance today we're going to talk about a lot of the models regarding externalities and public goods and um expected utility models for when you think about insurance today's a lot of econ so between me being sick and there being so much econ I think uh we might feel similarly by the end of lecture um you might be less likely to pass out but uh we might feel similarly warn by the end of this so uh it'll be fun though I swear it'll be fun um I wouldn't have missed this for the world let me put it that way okay here we go so today is about market failures and social insurance so we're going to cover externalities and public goods in the beginning which both we should you should have seen both those Topics in micro right yeah okay so you I'm sure you've all noticed that there were no readings for this week good the week um that's because a lot of the topics we're going to cover are review for micro if they happen to not be reviewed for micro then um they are covered in chapters five and seven in your textbook externalities and public goods are in there okay so then we're going to talk about we're talk about externalities we talk about public goods we look at some models and then uh we're going to move on to Social Insurance social insurance um we're going to talk about the expected utility model how we think about agents considering uh utility over risks we're going to talk about adverse selection crowding out moral hazard and finally op social insurance we may not get through all of social insurance today in which case we'll pick it up next time it'll be fine okay let's get into it so just a review quickly remember in this course markets are innocent until proven guilty government is guilty until proven innocent right we're always suspect of government intervention until we have a justification so let's go through our our sort of justifications for government intervention again well first of all when there's an interest in redistribution you know the private equilibrium may may well be P optimal in the absence of all market failures it will it will be Paro optimal but we may have views of the distribution of resources that that equilibrium entails that are sort of uh we don't like them that we find them suboptimal in some sense and so we might have uh an incentive for or an interest in government intervention in order to create redistribution because we may not like the way foress to divided between consumers and producers between High income and low-income people between wage earners and capital owners we might choose to have government intervention to have redistribution um there is the rationale is due to market failure which is something we also talk a lot about in this class the kinds of market failure we've talked about previously include Market power right when there's a monopolist or a monopsonist who is not a price taker but is actually affecting the price of either output or input um factors by when they choose their quantity uh there the presence of externalities will lead to market failure an externality is simply um when one when one party in the market uh chooses a quantity to demand or produce they're actually exerting a positive or NE negative um impact on other agents of the market and those impacts are not internal ized into their opt into their decision- making as to the optimal amount to produce or consume um in if there are public goods the private Market will have um will fail to produce in efficient equilibrium um and finally missing markets due to asymmetric information are an example of of U market failure which we'll talk more about when talk about social insurance this is particularly true in Insurance markets where one side of the market has more information than the other we'll talk about the case where consumers of insurance have more information information regarding their risks than the suppliers of insurance do and that asymmetric information can lead to market failure or the underprovision of insurance and finally um the third major rationale for government intervention is simply paternalism the government governments may think that agents fail to rationally save for retirement to care for their children um in some cases to the point that they should uh they may want you to buckle your seat belt etc etc that's simply paternalism where they think that the agent is not that individual agents are not able to maximize their utility effectively okay let's go on to externalities to start there so externalities arise whatever the actions of one party make another party better or worse off yet the first party the acting party neither Bears the costs nor receives the benefits of doing so so there are impacts of their actions that they do not internalize they're externalities in the case of externality uh market failure arises because the private marginal cost of production doesn't equal the social margin marginal cost of production or the private marginal benefit of consumption does not equal the social marginal benefit of consumption there's some dis dis um they're not equal the private and social are not equal because there's some externality that's occurring to agents outside of the private marginal benefit private marginal cost in the case of negative externalities the private equilibrium will read lead to Too Much quantity too much consumption or production in the case of positive externalities the private equilibrium will lead to too little consumption or production so if I'm telling you that um the problem is that there these sort of external costs or benefits that the agent acting doesn't realize or doesn't internalize the solution to this problem is toes SEO get them to internalize those impacts of their actions this can actually happen via private negotiations according to the coast theorem does any remember the coast theorem for micro economics the co theorem says that if we can allocate property rights to one side of the market then we can actually and with the absence of uh negotiation costs within few with a few other conditions the private Market can actually resolve that the externality issue and Achieve an equilibrium that's that's efficient even in the social sense if a coast equilibrium is unable to be achieved right if a Cod theorem can't hold because the assumptions fail then there's a rational for government intervention here that the externalities give rise to a market failure that can then be uh that could potentially be fixed by government intervention so just a review quickly to give a very short tale of Coast imagine that there is let's go back to our paper mill example there's a paper mill producing paper products for every unit of paper they produce they produce a unit of dioxin which they then dump into the stream Downstream are fishermen who fish for a living every unit of dioxin kills X many fish and makes them less productive the marginal damage function is linear so one more unit of dioxin kills X more fish regardless of how many units of dioxin are in the river So Co say this is this is a negative externality right because the the plant the the paper plant oh yikes uh need that thanks um the paper plant right doesn't care really about the dioxin going to the river to them the dioxin is just a byproduct of production they set quantity examining their private marginal cost of production and the demand function for paper product where those two uh where those two intersect that's where they choose to produce right that's how they set their equilibrium but what we're saying is that there is a marginal cost to Society of paper production that is in excess of what the plant actually feels right that's the cost to the fisherman Downstream from all the Dio and killing the fish in the river so what Co says is that you could if you can allocate property rights this can actually resolve itself given that negotiation costs are low and that there aren't hold out problems that the parties can actually get together and negotiate an outcome but let's say we give the property rights to the fishermen let's say every unit of dioxin dumped into the river reduces their profitability by $100 so the fishermen now own the river they're going to go up to the plant up to the paper plant right knock on the door and say you know what your dioxin is killing fish it's reducing our productivity we own this River every unit of dioxin costs $100 profit so we're going to find you $100 for every unit of dioxin you dump in this River why is this enforcable because the fishermen own the river right we've given them property rights over the river and that and so the the that negotiation will lead the paper mill to then internalize the damages they're causing and they'll reset quantity with that $100 fine per unit of dioxine dumped in mind right and we'll achieve the socially efficient equilibrium where the social marginal cost equals a private marginal benefit and we'll have we have the efficient equilibrium the same would be true in fact if we give the property rights to the paper plant so this is according to Coast right if negotiations are frictionless and the parties can come can come together suppose we gave the property RS to the steel mill or the paper mill sorry then uh the fishermen would say you know what they are dumping all this dioxin in their River sure but you know what it cost 100 bucks per unit of dioxin dumped why don't we try to just pay them off we'll pay them off $100 per unit of dioxin dumped so if they if we pay them $100 they won't dump that unit of dioxin and we'll be more productive as fishermen that is also an efficient outcome right because even in that case when the paper mill owns the river the fisherman are still able to force the Paper Mill Operators to internalize the marginal damage of dioxin dumping in the sense in in in essence we're able to change the the marginal cost function to the social marginal cost function and we achieve the efficient equilibrium the distribution of profits right will be different in these two cases right if we give ownership to this paper mill or the fishermen whoever gets the ownership get is better off because the transfers go to them rather than the other side but the efficient equili has achieved in either case that's Coast in a nutshell if you want to hear more about you know the flaws in Coast that make it less um applicable to the real world world please read chapter five it's all in there I don't have time to go through it all right now because we have a lot to get through is this really pertinent or sort of pertinent I think it's okay well you why don't you tell me if the state own the river which it does this country then they could still find the amount of M and internalize all the same way all we need is Define property right it could be a third party it could be a third party right that that owns it we just need Define property rights such that one one that someone can actually uh enforce uh there's ownership of the river so any damage done to the river can then be sort of um can be it can be uh leveraged in order to make the transfers that are needed so the marginal damage is internalized um there are a lot of flaws in Coast there's hold app problems with the fishermen there's a lot of fishermen they have to come together and agree on making this transfer to the steel mill or the paper mill in the case of the paper mill owning the river there are issues with uh so hold Out Among the fishermen There's issues of assigning marinal damage to one there's more than one paper mill on the typical River assigning damage to each of the Mills there's the issue of measuring the actual damage what is the damage what's the linkage is it linear is it nonlinear there's a lot of issues with coast and you know the applicability of the coast theorem to the real world is limited it's very limited it's only frankly even remotely possible in situations where the effect of the externalities are very localized and there are a small number of actors on both sides so this can actually maybe potentially be handled I mean it could work in another the state could own the river but it's really the flaws and the coast assumptions that prevent it from being to in the real world um just in general during this lecture I'm going to fly by throughout stuff there's a lot of stuff to cover so if you have a question I'm all ears as long as you think it's a really pertinent question and not something that's better held to after Le after lecture okay so Coast Solutions are likely in small localized externalities for larger more Global externalities like global warming um like endangered species issues like Fisheries issues those are all issues that Coast is unlikely to really work right and that's a case where government intervention can really be justified okay so let's go through the simple model of a negative production based externality we're going to go from paper mills to steel mills this why I kept saying steel mill earlier so this is a steel mill and the steel mill is deciding how much to produce right this is it has a demand function our demand function we're not there's no externality from steel consumption in this model so the private marginal benefit of Steel consumption is equal to the social marginal benefit of Steel consumption so the demand the demand curve is simply our demand curve there we go our supply curve initially where s equals PMC is a situation where the supply curve is equal to private marginal cost I.E the cost of Labor and capital inputs to produce each quantity of Steel right it's the marginal cost of that of producing that level of Steel that the quantity of Steel and it's simply the labor and capital inputs what the firm faces as a cost of producing Capital but this is a situation where we we're modeling um a situation where steel production actually has a negative externality some kind of negative environmental externality that's equal for every unit of Steel produced so the marginal damage caused by one unit of steel production is the same as the ninth unit for the first unit is the same as the ninth unit of steel production it's flat the marginal damage curve is flat so when we try to reflect this marginal damage and plot the social marginal cost curve rather than the private marginal cost curve what we're going to do is lift the private marginal cost curve by a fixed amount marginal damage right because what we're saying is that there is an negative externality from each unit of Steel produced that is equal right it's like $5 of negative externality per unit of Steel produced so we're going to add the marginal damage to the private marginal cost function and get the social marginal cost of Ste production and that's our red line the presence of this next negative externality means that the private equilibrium what we call Point a here with q1 being produced is too much quantity because like there's extra cost to that production that's the marginal damage to the environment or to some other part so if we actually reflect that marginal damage function or that marginal damage of of production and we look at the social marginal cost function we the equilibrium is in fact B at a lower lower level of quantity Q sub 2 any questions about this one way we could force this firm to internalize the marginal damage its steel production causes is by leving attacks a leving attx t which is equal to the marginal damage function right because what that would do is transform the the firms private marginal cost function from the blue line to the red line because it would be internalizing the damage is causing to the environment because it would pay a tax of t equal to the marginal damage for every unit It produced and thus it would it would choose to to the market equum would then become B right because the tax would force it to internalize the marginal damage so this is one way we talk about externalities there's another model in which we discuss externalities so in this model the x-axis plots pollution reduction so as we move from left to right pollution is going down reduction is going up as we move from right to left as we move towards the origin the amount of pollution is actually going up our initial equilibrium is the point a right this is this corresponds to this a where the private the private equilibrium is a and there's no reduction in pollution right whatever the private equilibrium wants as quantity that's a and there's no abatement involved I'm going to use the words abatement and reduction interchangeably I might also use the word scrubber to just describe a pollution reduction technology a scubber is something you kind of attach to a smoke stack that takes out some of the dirt and you the dirty the dirty the the sort of the com the the compounds that are in the air and cleans up the air coming out I'll also use scrubber to describe something that's cleaning up sludge I'm not that technical so scrubber is just my sort of catchall term for the technology that reduces production I'm going to call it pollution reduction pollution abatement this all means the same stuff okay so a is our zero reduction full pollution equilibrium right we said that the marginal damage of each unit of pollution is flat right some constant amount like five bucks or something so the marginal benefit of each unit of pollution reduction is also flat right it's the same $5 so the social marginal benefit is equal the marginal damage amount social marginal benefit of pollution reduction is a flatline remember what we're plotting here is pollution reduction so we're talking about social marginal benefit of prodution reduction and it's a flat amount and then we have our blue line which is the cost of pollution reduction it's an increasing function because it's easy to get rid of your first unit of of of of pollution right you put on a cheap scrubber it's gone the second unit's a bit harder you need more expensive equipment the last unit's pretty expensive to get rid of right to poll to eliminate the very last unit of pollution is very expensive so we have an upward sloping marginal cost of a bait this is a case where we're saying that there's a negative externality to steel production but there's no externality to batement right the fact that you're installing the scrubber has no externality that's dealing with the externality the externality comes from still production this is the market for pollution reduction is the way to think of it so okay so we have our and this is a case where our private marginal cost of pollution reduction is equal to our social marginal cost of pollution reduction because there's no externality from pollution reduction itself okay so we have our social marginal benefit function our social marginal cost function the socially efficient equilibrium will be where these two lines intersect which is at point B so point B is where there is a level of pollution of P star a level of pollution reduction of R star P star and R star are complements it's sort of like labor and Leisure right it's like consumption period one and savings they're just compliments so the optimal level of pollution is p star the optimal level of reduction is our star and we know that that level is costing on the margin MD right that last unit cost MD to aate to reduce pollution okay so let's go back for second let's go back to this model so if I wanted to sort of achieve this right if I wanted the firm to actually do this we could come up we could think of a couple different ways for me to make this happen in the market right I could say that the firm has to pay a tax t equal to the marginal damage right and that way the firm would internalize the cost and choose to Abate such that they achieve a pollution level of P star because they would be feeling that marginal damage they're doing the other way I could do this is as the government as the EPA I could say you know what no more pollution than pear that's it that's all the qu quantity of pollution you're get you're allowed after that it comes shut down your plant the first taxation is sort of a price-based instrument to change to change polic to change the behavior of the firm right when I come in and say p star is it you know you got to you got to aate at least rstar that's a quantity based regulation of the pollution this Factory is putting out right if I had the information as to what R star is right or if I had this firm's marginal cost of abatement function if I had this Blue Line If I had all that if I had that functional form and I knew marginal damage I could either choose to impose the tax as the EPA or I could choose to just say you know what it's p star because I'd have both of those facts at hand right right I could choose to tell them the tax is T equals MD even without knowing the marginal cost function right I would care what it is but I wouldn't need to know it in order to to to enact that policy so in order to actually figure out what pollution level is efficient for society I need both the MD curve and the marginal cost of a batement curve right right okay we're going to now talk about two cases where sort of you know here I said you know it's pretty we could do taxes we could do quantities it's one it's one firm it's one pollutant it's pretty straightforward we're now going to talk about two ways that complicate two wrinkles to this problem that could make the choice between quantity-based instruments and price-based instruments harder or more interesting one is that there could be multiple firms we're not going to think of there being two steel plants steel plant a and steel plant B steel plant B is old it's a very old plant it was built without the notion that one day this plant might have to reduce pollution in mind it was built without any concern for the for pollution reduction in mind so actually for Plan B to reduce pollution at all is very expensive plant a on the other hand was built more recently it was built by by designers who had some notion that the government might actually come in and ask them to reduce pollution so it was built in a way that reducing pollution in plant a is actually cheaper how can we see that in these curves well first of all plant a can actually reduce 50 units of pollution for no cost at all right how do we see that because it's intercept is at 50 also everywhere each additional unit of abatement is cheaper for plant a than is for plant B on the margin because the marginal cost curve for a lies everywhere below the marginal cost curve for B so pollution reduction is much cheaper for plan a than is for Planet B if we want to figure out what the total cost marginal the marginal cost for this industry imagine these are the only two steel plants in America if we want to figure out what the marginal cost of pollution reduction is for the steel industry how do we do that we [Music] sum horizontally right we sum at $100 X+ y equals z that's how we get this marginal cost of T function we add up horizontally at every point so marginal cost subt is the industrywide marginal cost for abatement the socially optimal level of ution reduction will be at Z which is 200 units of reduction how that's divided by the two firms is dictated where they we just know where did we get MC subt from we just added up the other two so we know that where they intersect the same line is going to tell us how much they should each do it's efficient in this market for firm a our newer firm to Abate 150 units and for firm B to Abate 50 units this is when the marginal damage of dumping is $100 is flat so suppose this a regulator if I went with a tax right suppose I put a tax of $100 per unit on this on this industry would I get the efficient equilibrium what would happen if I levied the tax of MD if I made a put a $100 tax per unit of Steel produced what how many units of pollution reduction would firm a undertake 15 150 it's exactly where the intersection is exactly firm B 50 that's efficient right that's exactly what that's the sum of $200 200 units of reduction that's perfect that's exactly what we want the tax instrument works well here suppose as the regulator I knew the industry wide curve I knew MC subt so I know that the total amount of reduction I want in this industry is 200 but you know let's imagine I'm a dumb regulator and I say okay there's two plants let's have them each do 100 that seems fair there're two plants we want units reduced let's have them each do 100 would that be efficient no cuz that would mean firm B is over reducing relative to the efficient equilibrium right cuz them doing 100 cost look look at the marginal it's the marginal cost of their 50 through 100th unit is really high it's well above $100 right that's where all of this loss comes from that's that's inefficient firm two on the other hand only undertaking 100 units is also inefficient because they have much lower cost of abatement right in what it should be is that firm B firm a sorry firm a should be undertaking a lot more abatement firm B should not be taking undertaking as much abatement because it's much more costly for firm B B to undertake pollution reduction than it just for firm a there's another way I could set the quantity but allow for the heterogenity of firms to actually work for us right to harness this sort of differential efficiency at pollution reduction what's that called does anyone know cap and trade right this is a situation where I know the total amount of reduction I want but I don't have information regarding the marginal cost of a batement for the two firms all I know is that pretty much that I'm pretty sure they're different they're not the same so what I do is suppose we had a th units pollution initially I want to reduce that by 200 units I'd issue permits for pollution I'd issue 800 such permits right eight permits for 800 permits for one unit of pollution each I could divide them up any any way we want it right some people might say let's really protect our old industry guys and give a lot of them to firm B some folks may say firm a is you know our new hungry young let's give them more of the permits we might split the difference and say you know what let's give them each 400 I assure you it doesn't matter who gets how much of the permit for the efficiency of this outcome because what's going to happen is that the value of that permit is going to be bid up until it is equal to the marginal cost of abatement for the most efficient abating firm right that's what's going to determine it when the day at which firm a realizes that you know what they could aate a because it's always cheaper for them to Abate until they get to 100 right and it's always cheaper for firm B to buy permits rather than a baate until the price gets to 100 and that's where equilibrium will be reached the price of the permit will adjust to achieve the efficient allocation of pollution reduction given that the total quantity of reduction is Right given that we got the 200 right the firms will allocate the permit between them such that they each efficiently reduce as they should so so as long as it's set the total quantity reduction at 200 it will turn out with with a permit trading system that firm a will reduce by 150 while firm B will reduce by by 50 they'll figure it out because the price of the permit will adjust to allocate pollution reduction efficiently across the two firms so there might be in you know there might be uh political reasons to give the permits to one party or the other right really powerful Congressman lives in in the district that plant B is in uh the White House really wants to Foster uh the Technologies other Technologies being developed by plan a there might be a political reasons to allocate the permits differently right but the efficiency of the of the outcome has has only to do with getting the total quantity of permits right okay so let's talk about this again in and with this wordy slide here so the policy options for heterogeneous cost of reduction quantity regulation right the efficient solution is one where each plant for each plant the marginal cost of reducing pollution is set equal to the social marginal benefit of pollution reduction I.E the marginal damage the reduction is 150 for a and just 50 for b a uniform reduction rate was not efficient because they have differential costs of abatement in the case of a pauian tax that's where we set a tax equal to the negative externality that the firms are causing this firm the firms give get tax savings right from not polluting so they're going to reduce production such that they achieve the efficient equilibrium because what the tax does is simply Force the firms to internalize their externality and finally the last thing we talked about is tradeable permits trading trade trading right the ability to trade those permit between or among the firms allows the market to incorporate information or incorporate the differences in pollution abatement costs across firms those are our three sort of policy instruments one of things that's not in this right because this is a static model there's no time Dimension here but as policy people one of the key sort of policy questions is does one of these instruments really do a better job of fostering or incentivizing the creation of Technologies for abatement right because the best way to reduce pollution in the long run is for all of these CL curves to flatten out for the marginal cost of abatement to fall for firms right that's the really efficient way to reduce pollution in the long run and so it's sort of one of the things to think about and I don't have an answer for you but but one of the things to think about is which of these policies creates the right long-term incentives to to build um Innovative sort of prowess in pollution abatement right in a cap and trade system we can imagine a system where you know we say this year we're going to reduce permits by 200 so be 800 permits this year next year there's only going to be 750 the after that 700 put we put the industry on a trajectory that says you know what without without the creation of more efficient abatement Technologies the price of permit is just going to go up right that's one way to do it when it comes to a tax it could be something like we we put in place a tax that's rising over time right or if we just go for the total quantity quantity system that's sort of we've talked about how it's kind of boneheaded but it is simple we could say we're going to reduce those quantity caps over time part of it this is a static model but a lot of um the most important parts of these types of of policies is actually Dynamic so a little beyond the scope of this class but it's something really important to consider when you think about this stuff okay so that's the effect of heterogeneity in abatement cost across firms and how that complicates sort of our choice of instrument how are folks feeling pretty good it's going down okay it's everything's fine okay this is now this part's a little bit more complicated it's about uncertainty so we're going to talk about a situation where the EPA has done the best research it can and has come up with their best estimate of what the marginal cost of a batement looks like in this industry and their best guess of the marginal cost of pollution reduction for this industry is MC1 we know that the marginal the marginal damage function is MD and we're going to consider two cases so sorry let's back up the the EP has done the best it can to figure out the marginal cost function for this industry it's their best guess is MC1 it turns out that the EPA was somehow wrong that their very best research some have underestimated the costs of pollution abatement and the true marginal cost curve is not MC1 but it is instead mc2 notice that mc2 is simply a vertical lift of MC1 so they've underestimated the marginal costs um their underestimation is a flat amount across the curve we're going to consider two cases where there's this surprise in the cost one is a case where the marginal damage function where the marginal damage is what's happening to the environment for every unit of pollution produced is really flat and one where it's very steep notice now before we were talking about a marginal damage function that was horizontal now there's someone downward slope to it right what does a downward slope mean again it means that the initial units of damage are much higher in terms of the initial units of pollution exert a higher marginal D damage per unit than the later ones right that's all the downward slope means we're going to talk about two cases one where the marginal damage function is really flat like this one when it's really steep like this notice that the difference between MC1 and mc2 is the same in these two models they have the same slope okay so let's start here let's start with the blue lines the marginal damage function is certain it's just very flat the marginal so this could be a situation where this is the example in the textbook of global warming why is the marginal damage function really flat when it comes to global warming because we're talking about a batement this year most of the cause of global warming right is CO2 that's already up there I mean we should aate there's no you know there's no reason not to aate it's really costly but there's some reason to have some interest in in abating right but most of the cause of global warming is already behind us making it worse may not be a good idea but the s sort of gain or the marginal damage of one more unit of carbon of CO2 given how much is already up there is pretty flat it doesn't matter that much so our marginal damage function here is really flat so this is again the case where you know EPA has done the best research it can to figure out the marginal cost for industry is for pollution reduction and their guess was MC1 is is the curve so according to epa's best guess the ideal amount of pollution reduction is R sub one right the equilibrium should be C the amount of reduction should be R sub one the amount of pollution should be P sub 1 and it should be at a cost of C sub 2 that's the initial that's what APA sort of model in mind is it could so suppose it turns out that you know what the costs are actually higher the cost are mc2 if the costs are mc2 the equilibrium should be R sub 2 right R sub 2 amount of pollution reduction because the equilibrium is b r sub2 with a pollution level of P sub2 that's what in reality should be the equilibrium but remember that EPA thought the model was equilibrium C with r sub1 p sub one suppose in order to achieve equilibrium C right and have R sub1 level of pollution the EPA put in place a quantity regulation they told industry you can only pollute P sub one you must Reduce by R sub one they told this is what they told the industry EP has gotten it wrong right that's no longer the optimum there's going to be too much reduction of pollution right we're going to over ruce by how much well this is should be the equilibrium quantity this is the equilibrium quantity this great triangle ABC is the dead weight loss of EPA getting it wrong right does everyone see that because we've over reduced by units R sub2 to R sub one each of these units between R sub2 and R sub one the marginal cost of reducing that of eliminating that unit of of prod of pollution is higher than than the benefit which is the reduction of marginal damage right it's higher than the social marginal benefit of getting rid of that unit of CO2 so all of this is wasteful right and it's wasteful because EPA just got it wrong right the curve is actually slightly different than they thought it was so the dead weight loss in this case of getting it wrong if we do a quantity regulation right is ABC suppose in order to achieve equilibrium C instead of doing a quantity regulation the EPA put in a tax and they put in a tax at level C sub2 because that also corresponds to the equilibrium at Point C right so put in a tax of C sub2 if this is the true industry cost function where will industry choose to produce how much pollution reduction will it undertake where will the where will the real equilibrium be anybody e exactly because that's where the real marginal cost curve uh intersects the tax so they're going to Abate by an amount R sub3 in the case of a tax they'll pollute at p sub3 is that more or less than the than the best equilibrium less so they'll be under abatement here too little pollution reduction be too much pollution but in this case the dead weight loss is dbe which is smaller than the other case with quantity regulation right and the reason behind that is because our marginal damage function is so flat the dead weight loss from putting in a level of quantity regulation that's too high will be larger than the dead weight loss from under abating because we've been relied on a tax because what happens is if there's uncertainty about the cost function the cost true cost ends up being too high the two cost is higher than what we guessed if we put in a quantity regulation we'll over aate if we put in a tax industry is going to under aate because the marginal cost is much higher than they thought it was right so that tax is going to lead to less reduction the reason why this Ted weight loss pattern works this way is that in the case of a really flat marginal dead marginal damage function we aren't actually that worried about getting the quantity absolutely right right because the curve is so flat the consequences of getting it a little wrong are not that big but the cost of forcing industry to over rebate are really high because the marginal cost curve is so much steeper than a marginal damage curve here so in the case where our marginal damage function is really flat our curve is really flat quantity regulation will lead to more dead weight loss if we if the costs are understated than taxes remember here this is an upward shift of the marginal cost curve right and this is because here we don't care so much about the quantity and getting it right we want to reduce but if we reduce by a little bit less it's not the end of the world because our marginal damage function is really really flat let's look at a different case this is like global warming right now let's look at nuclear leakage so nuclear leakage whatever reason the equilibrium is at C I actually think the equilibrium should be somewhere way over here right like nuclear leakage is not good stuff we want very little of it it's very very important we get the quantity right maybe it's see if we're including some leakage that's happening somewhere that no one lives right like you know Nevada I kid I kid um God my jokes are really bad um uh anyway um so so it's at C right so nuclear leakage is a thing we care a lot about the quantity right that's why the marginal damage curve is so steep then once you've once there's been toxic waste somewhere once nuclear leakage has occurred that first unit is pretty much the key unit right once a little bit of nuclear leakage has occurred the place is pretty much contaminated the marginal damage curve drops off pretty quickly because this is a place where you want zero you really really want zero or there's some some initial level after which you're in trouble right once you get to Point whatever where this curve starts you're in big trouble there's some amount we can probably tolerate but after that you're in big big trouble and really once you reach that level it's bad no matter how much worse it gets it's still bad okay that's why our maral damage curve is so steep notice here EPA has made the same basic mistake it thought the MC1 curve it's thought the marginal cost curve was MC1 it turns out it's mc2 the difference is the same between the two graphs here suppose they tried to achieve the C the equilibrium of C by putting in a quantity regulation of R1 one they get it wrong right there's again a dead weight loss the dead weight loss is triangle ABC suppose they put in a tax of C sub2 again they got it wrong right they got the marginal cost curve wrong instead of getting R sub one we in fact get R sub3 because that's where industry is going to choose to a b to notice the dead weight loss triangle dbe here is much bigger than ABC and that's because this is a place where we care a lot about the quantity so relying on a quantity based regulation is going to leave us with less dead weight loss in the case of uncertainty than a price based regulation the lesson here is actually very simple when we care a lot about the quantity of pollution reduction a quantity based regulation is the safer way to go I'm going to stop for a second when there's uncertainty what we really care about qu what we really care about is quantity of pollution reduction a quantity based regulation is the safer way to go but in the case where what we're really concerned about is the cost to Industry of abatement right that we really don't want to impose a regulation that ends up shuttering businesses right that could very much be the case of global warming right because if we're only acting on the US part of of the world economy we could really impose very high costs on us businesses that could then relocate right that could be an example of a place where we're really worried about the the costs we're imposing on business that's the case with a price-based regulation using a tax may be the safer way to go does that distinction make sense to folks because partly when you impose a tax what you're telling is what you're telling industry is hey guys aate until the point where your marginal cost of abatement equals this tax if you've gotten the cost curve wrong the amount of pollution reduction will be different right that's that's you're leaving it in the hands of the marginal cost curve whatever it might be when you impose the tax when you impose the quantity you're fixing the amount of pollution in the air regardless of what it costs industry to do it right so if there's uncertainty about cost you could be imposing really high cost on industry so it's just a trade-off when you fix the quantity you could potentially be be levying very high costs on industry when you fix the tax you're fixing the cost to industry but you could potentially get a different amount of reduction than you wished for okay so let's talk again about instrument choice so which of these meth me price versus quantity will lead to the most efficient outcome depends on first of all the how heterogeneous the firms being regulated are if they're all the same then we can divide up the total quantity of reduction among them and divide it up and it's fine right but the more heterogeneous We Fear firms are the more maybe tax-based we'd like our instrument to be or cap in trade how important getting the level of pollution correct versus getting the cost of reduction correct which said that in the uncertainty model the extent of uncertainty over the costs of externality reduction the bigger that difference between MC1 and MC2 the more you might want to rely on one instrument versus the other right so one of your homework assignments for this week this is in exchange for not having reading this week um I want you to go home with this diagram this is called the whitesman uncertainty framework and play with it I want you to play with what happens if you shift the marginal damage curve instead of the marginal cost curve what happens if the marginal cost curve you've actually exaggerated it mc2 is below MC1 what happens if uh the marginal damage curve has slope to it oh sure just I mean just play with all the lines so imagine mc2 is below MC1 what happens then what if the marginal damage curve is higher or lower than you initially thought what if the marginal damage curve as slope and think about what happens to the dead weight loss triangles remember when I ask you to do weird stuff it usually tells you something about exam right I mean yeah so playing with this framework could be a good idea it's covered entirely in chapter 5 if any of this is sort of difficult and strange of course reach out to me and Vincent but you know it's in chapter 5 and review that um imagine that it was higher or lower or imagine it had slope what would happen to this diagram question yeah no I mean it's I mean pen and paper I mean some things in in this class are old school lots of things in fact um yeah just do it on pen and paper uh you know uh foggy bathroom mirror all of this would work okay um so and finally the extent of uncertainty of the damage that will occur right whether we're getting the marginal damage function rate okay so I've talked a little bit about externalities right but there's often a question I get when it comes to this topic is people have ideas of externalities that aren't externalities and people think certain things are not externalities that are in fact externalities so I want to go through an example with you which is smoking so smoking could potentially have externalities that are negative or positive in fact we'll get to a positive one in a second and so we're going to talk about a bunch of effects and then discuss it and say it's not an externality if this is true it is an externality if the if the other column is true so one potential externality that some folks suggest of smoking is that the health care costs are higher healthcare costs increase when people smoke that's not an externality if insurance companies can simply charge smokers higher premiums because in that case they choose to smoke they're really expensive to care for they pay for it it works out the rest of us are fine if there is some sort of Regulation or Norm that prevents Insurance comp companies from pricing smokers as they should be priced some folks may call it discrimination right discrimination against smokers if there's some regulation or social Norm that prevents that so that may be that in that case it is an externality because we're not able to pin the cost onto the smokers right we can pin the cost onto the smoker we're fine it's not an externality but if other folks end up paying for it then it is in fact an externality what about the effect of uh you know smokers tend to be less productive workers on average mostly because they have to smoke right they have to go out and smoke it reduces productivity and if you don't let them smoke then I mean they're really wishing they could smoke prod so an average uh smokers tend to be less productive workers controlling for all their characteristics but if employers could just pay smokers less because they're less productive this would not be an externality right if if smokers really are less productive and we can pay them a little bit less you know then that would be fine but if there are regulations Andy could not adjust wages according to individual productivity and then this would be this would be an externality because the whole firm would bear the the cost of the smoker less productive uh work time uh smokers tend to be involved with more fires increased number of fires so if smokers are only lighting their own stuff on fire right if it's only their stuff and they don't and they're able to put it out themselves and insurance companies can charge smokers more for being smokers when it comes to fire insurance then we're fine there's no there's no externality but smokers tend to not just hang out around their own stuff right they tend to be in proximity to other people's stuff and they tend not to have their own fire departments are able to put out all fires they start themselves and so and insurance companies know can in some cases but not in all cases uh charge smokers different premiums so there could be an externality in terms of starting fires right okay earlier death this is a positive externality not for the smoker remember the smoker is externalities about the rest of society what what tends to happen with smokers I'm sorry if any of you smoke I really have no problem with you smoking I don't care if you smoke it's not like a it's not a moral issue this is just about externalities and you know it's not a moral judgment in any way um but what does smokers tend to what tends to happen to smokers they die and they die young I mean compared to most people right so um one of the positive externalities of smokers is that they pay in to Social Insurance programs like Social Security and Medicare and they don't really collect because they die before they get there so that's a positive externality because it makes social security more solvent I'm not kidding you uh so so with the decline of smoking in the US has had like a real impact on the Actuarial balance of Social Security it's also a way that um sometimes illegal immigrants help Social Security because sometimes illegal immigrants use Social Security numbers to get jobs but then it can't actually collect the benefits because they aren that person but they're paying into the system under those numbers sometimes it depends on depends on the actual the payment scheme but you you know in some cases that's another way uh people are paying any situation people are paying benefits paying in and not getting the benefits it's a net it's a net gain for the system so that's a positive externality and also um medical care costs later on like of course when a smoker a smoker dies there are some health care costs but they typically die of just lung cancer um while old people sometimes have multiple very expensive illnesses like they're not going to be the person who has you know diabetic uh issues and has a heart attack and has some other cancer like they're not going to have the trifecta that can be very very expensive right so they'll die of one thing they'll pay for the one thing and it's done so yes the young death is a positive externality um okay and the last thing we worry about when it comes to smoking is secondhand smoke effects right secondhand smoke may have been the first one most of you thought of to be honest um so some of this the the the the the effect of secondhand smoke on people who aren't constantly around it you know there's some various studies but it may not be it may not be nearly as bad as for like the families of smokers right but if smokers really internalize the health of their loved ones of their spouses and their children and they don't smoke around them this could be less of an externality than we think it is there used to be possible to smoke in New York bars right and so if I was in there and I'm not a smoker so if I was in there and I was trying to enjoy my beer and someone you know there's a lot of smoke it might reduce my ability to enjoy my beer right that's a negative externality it might be true for many people in the bar we could actually take care of that if we were all willing to like chip in a quarter to get that to pay that guy to not smoke we could internalize the externality right we could pay off to not smoke that's a way of he's sort of internalizing the costes that he's he's inflicting on us and equilibrium could be achieved there's no law against that but there's a social nor right it's awkward to go up to someone and say can I pay you six bucks to not smoke that cigarette it people tend not to do it right because most people are are really just not that into those kinds of transactional behaviors um this is a place where more economists would make the world a better place I think but uh so there are also there's there's there's regulations against sometimes internalizing external sometimes it's just social norms right you can't pay someone to get their kid to stop doing whatever they're doing right it's not I mean sometimes you can but you really you know it's generally frowned upon right it's generally frowned upon to try to pay people off to change their behavior in real time I was at think coffee earlier today and I was running late and I really I mean I would have done anything to just be able to go up with the people ahead of me and pay them off to let me get my coffee and it's just not normal right it's not normal behavior it's outside the Norms it would take longer to explain than it would to just wait in line okay that's externalities we're done with externalities anyone have a deep question about external okay I'm going to say one thing about externalities so when I uh so imagine uh me and Valerie are both coveting some item and I'm a demander and she's a demander the fact that two of us are demanding this thing increases the price of that thing right we don't call that a negative negative externality that's something we call a pecuniary externality and we don't call call that an externality because suppose Valerie's deire to buy this item is bidding up the price that I would have to pay when we think about demand remember we're thinking that there's a very close substitute for this good out there for everyone so if I'm bidding it up and she slightly can't afford it now or she's bidding up I there's a very close you know maybe rather than this orange I'm going to be happy with a banana and a half right that I could buy for the same price so that's why we don't call that an externality because a pecuniary externality money has other uses and we have very close substitutes there are other things you you desire very closely they're close substitutes for your util you might require a banana and a half to make me equally as happy as that orange but the prices will be such that that's possible right there there are Goods that could make me that we don't call that an externality externalities really have to come of this of the form we've talked about so far okay public goods public goods have two characteristics they're non-rival they're non-excludable non-rival means the fact that I'm getting utility out of it doesn't reduce your ability ability to derive utility from it non-excludable means that I can't stop you from deriving utility from this thing so let's think of a few different Goods so on this side we're talking about the good excludable on this side is it rival so an example of a private good right a good that is rival and excludable is like an ice cream cone if I'm enjoying an ice cream cone it certainly reduces your ability to enjoy that ice cream cone and I can stop you maybe if I was bigger i' be better at it but I could stop you from eating my ice cream cone right it's excludable rivaling excludable um an impure public good uh so is the good let's think of about cable TV once the cable for cable TV is laid in your area the marginal cost of actually putting it into your house is very low so it's actually not really rival cuz I have cable we're not going to you know we're not going to fill up the whole um cable wire you know it doesn't reduce my ability to get it because you're getting it so it's non-rival is it excludable oh yeah right that's why you can't pirate HBO so that's an example of a nonrival but excludable good is cable TV um an example of a rival sorry I said that so so cable TV is is um it's non-rival and it is excludable right because the cable company can stop you from consuming it uh by just blocking you example of another impure public good um an example of a good that is rival but isn't excludable it's like sidewalk space outside in this area right all those tourists take up the sidewalk space you can't stop them from doing it but the fact that throngs of them are walking around stops you from getting where you want to go efficiently right that's an impure public good sidewalk space um but the you know the quintessential pure public good example that's non-rival and non-excludable is like National Defense right I can't stop you from feeling safe because we have a good National Defense System and because I feel safe doesn't reduce your ability to feel safe from our National Defense System any questions about what a what a public good is there are very few pure pure pure public goods things that are very close to Pure public goods we just think about as public goods but sometimes there are impure aspects to it something is very few things are truly truly non-rival right there are few things that are completely non-rival and non-excludable too okay so w so before so don't look up here yet uh so how do we normally add up things in Market suppose we're trying to add up demand for apples and I ask you know I ask Mana if that cost of an apple with a dollar how many apples would you demand you say something like three there we go ESP there uh and then I ask Matt how many apples would you demand at a dollar your name is Matt right okay good uh and we'd add up suppose they're the only two demanders in this in this in this uh in this market we'd add up their demand at a price of two and get demand would be aggregate demand would be five how are we adding up when we do that like when we added up this marginal cost curves how do we add up in in economics generally with private Goods horizontally right at each price level we add up how many quantities of demand you've all wanted to add up vertically I know I know it's your deep desire to add vertically I'm telling you this is your one chance public Goods we add vertically and why is that it's because when I ask you how safe how much would you be willing to pay for an aircraft for for the US to build an aircraft carrier how much utility would you derive from that just pick a number any number or value how much utility do you derive from the building of another aircraft carrier by the US s $7 of utility uh VRA how much utility do you drive from the building of of an aircraft carrier pick a number I mean really doesn't matter 50 okay and then if so and if I asked uh Kelly how much utility do you dve from The Bu derive from the building of an additional US aircraft carrier zero zero okay so we're going to add up seven and 50 and zero so the total benefit to people to the to this Market the three of you is 57 I just added vertically and that's the value of that aircraft carrier if I were to ask how much utility would you derive from two aircraft carriers you would all say numbers and we'd add up your private marginal benefits to get the social marginal benefit because this is a special case because just because Valerie is getting seven units of utility from the creation of that aircraft carrier doesn't stop vasundra from getting 50 units it's not like an apple where Valerie is eating it and vasundra can't enjoy it right and it's non excludable she can't stop her the stuff just adds up because it's a public good it's a public good so when it comes to public goods we add up the social marginal benefit by summing private marginal benefits across individuals logically it makes perfect sense right makes perfect sense okay so if efficiency in these markets always implies that the social marginal benefit equals a marginal cost so here we have the we have individual sort of demand for missiles in this case private marginal benefit for each person is the first two lines we add them up to get the social marginal benefit of missiles the Blue Line in the bottom diagram we have the social marginal cost of of missiles which is simply the private marginal cost we ask you know uh McDonald Douglas whoever builds missiles what does it cost to build a missile and that's where we get the C curve from awesome any other questions any questions about this rather cool okay so private good uh private markets are going to underprovided problem if I'm willing to donate $100 to build an aircraft carrier you feel less less inclined to donate because you can fully enjoy my $100 of aircraft carrier right if I'm going to build one out of my private funds you would want to pay tax dollars to build one because you can feel the full benefits of my of the aircraft carrier I pay to build that's called the free writer problem when an investment has a personal cost but a common benefits but a common benefit individuals will underinvested to the underprovision or complete absence of the private provision of public goods there are certain situations in the real world situations where folks can come together and actually privately provide public goods one example of this is something that we see here in New York it's in business Improvement districts so one uh Time Square is a business improvement district where F where the business owners right uh contribute individually to a fund s to a fund that then provides public services to that District that area it's things like trash pickup it might be additional safety um officers you know that are working in conjunction with the NYPD uh it's sort of local amenities right that are provided why does this work well first of all this is a situation where the businesses of Times Square want more Public Services why won't the city of New York provide those because the benefits are very locally felt and the tax dollars would have to come from the home whole city and as we all know most people live in New York don't go to Times Square right this is a it's a benefit that they would probably never feel right and so there's a there is a free riter problem for the whole city but those businesses that reside there would very much benefit from that public good and there's a very high individual firm demand for those public goods they would really like cleaner streets and safer in a safer feeling because their businesses would benefit directly from that the second reason business improvement district work is that you only need 60% of business owners to agree to it to get one so the whole out problem the idea that well if everyone else is going to contribute they're going to do it anyway and I'll just hold out and not pay right if you realize that you want if everyone thinks they want to be the last guy to contribute and does not contribute what happens no one contributes right but you don't need that you only need 60% of people to contribute which breaks down the whole that problem it's those measures that lead business and improv districts to actually work so that local groups come together and provide private funds for public goods that benefit them all so there are some exceptions but in general the free writer problem will lead to the at least the underprovision of public goods by private markets um it's most likely again when there's especially high demand for the public good that the private sector will work but in general the private sector will not achieve the optimal level you could imagine even in business Improvement districts the optimal level of public goods might even be higher than what they're providing Right Time Square should be maybe even cleaner and have even more cops and more neon lighting no I'm kidding I'm kidding I'm kidding okay so the role of government providing public goods so when there are problems with private markets right when the private Market is under providing public goods the government has justification to set step in in fact a lot of what government does at the local level at the state level and at the federal level is the provision of public goods it's stuff like cops and firefighters it's stuff like well-maintained roads it's stuff like public schools even right a lot of what the government doing in some aspects Public Schools fall in this category um in the sense that a well-educated uh like labor force has benefits to everybody and less crime and all kinds of stuff so there's a public good aspect to a lot of things that government does it's actually one of the main functions of government is the provision of public good so whether or not the government can actually step in and do this to efficiently provide public goods to the market depends on a couple things first of all the ability of government to appropriately measure the cost and benefits of provision to get it right they have to figure out what everyone's private marginal benefit is add it up correctly have the right cost function and find the right equilibrium right they have to have the right cost and benefit functions second even if they have the functional form right right if they have the right marginal cost function the right marginal benefit function they know equilibrium is at Point a with a quantity of Q sub one there is a real potential for the system to get it wrong because the politics doesn't work right we could imagine that our Congressional Representatives get a lot of utility about Ser from serving their District well from providing the right level of services for their constituents but you could imagine you know in a in a perfectly rational reasonable no one's being mean about it world that they also get utility from you know their bra being able to put braces on their kids teeth uh maybe the occasional junk it right maybe you know the occasional steak dinner and all of those things have some some weight in their utility function that's nonzero and that could lead for the allocation of public dollars to be somehow different than the efficient allocation of public dollars into public goods right and so there's two things that have to happen for government to get it right they have to be able to be able to get it right to compute the right to figure out what the right level is second we they have to actually be able to do that and you even the figuring out what it is is hard right because if you ask me what my marginal benefit of public schools is that's a hard question even answer right it's it's it's a difficult question to get to get right to begin with and for the politics to carry it out can be complex as well but there is a rule for government to step in in the situation where the private Market is about under providing this public good okay now we're going to move on to social insurance and we have awesome is this clock right does can someone check their phone and make sure that's right say 45 7:45 yeah this is okay so remember your job but but you have to do it at 8:10 81 810 because we have to have a discussion okay terrific so we're going to get through a bunch of social insurance okay so social insurance programs basically provide insurance against against Adverse Events no one insures thems against good events right no one's like in case I win the lottery please give me more money right no one has insurance against good events you insure yourself against Bad events and the so in the US uh social insurance programs include UI unemployment insurance which is insurance against the adverse state of being unemployed disability insurance which provides insurance against the adverse state of having a career-ending injury workers compensation which ensures against the adverse event of being injured on the job such that you're temporarily out unable to work Social Security which ensures individual against the adverse event of outliving your savings um and Medicare which ensures the an individual against the adverse event of having extremely high medical expenditures in your an old age um okay so what is insurance so insurance is a system in which the individual pays a premium and then receives benefits in the case where the adverse event occurs so I'm going to stop for a second can totally just this is this part of the class that you know write this stuff down in in like phrases and bullets so just like so in the intertemporal consumption model we were smoothing consumption between two periods right we're choosing consumption in Period one versus Peri consumption in Period two we wanted to equate marginal utilities across two time periods in that model right this is a analog but Ina instead of equating marginal utilities across periods of time we're equating marginal utilities across states of the world what do I mean by state of the world so today I said I stand here today there's a tomorrow right tomorrow could be a day where it rains or it doesn't rain it could be a day where I have a job or I don't have a job it could be a day where I have a house or my house has gone up in flames right those are all states of the world we'll always deal with there being situations where there are two states of the world the event where the bad event doesn't occur and the state of the world where the bad event occurs and the way we're going to think of insurance is that in the state of the world where the bad event occurs the insurance company gives you money that money could fully compensate you for what you've lost which is the case of full insurance where we say that the bad event occurs you lose $50,000 the insurance company gives you $50,000 that's full insurance there could be a kind of insurance where the bad state of the world occurs you lose $50,000 of consumption but the insurance company gives you $25,000 that's partial insurance but what's always true is regardless of whether the good event or the bad event occurs you pay the premium the insurance premium is paid no matter what happens so in the case where the bad thing happens the insurance company gives you money you're still sending them the premium on lots and lots of exams that I've graded in the semesters I've taught this class people forget about the premium in the bad state of the world so write it down always pay the premium you always pay the premium that's guaranteed you're definitely paying the premium in the badges the world you're getting money from your insurance company that you're getting a payout okay so we have a term for what particular premium the actuar fair premium is the product of the probability of the bad event which we denote P the probability of the bad thing probability that the insurance company has to pay out is p times the amount of money the insurance company gives you B the payout is B so this is the premium at which the insurer breaks even right because imagine you you know you're paying the actual Fair premium suppose the bad event occurs with probability 10% and in the case of the bad event the insurance company gives you $10,000 what's the actuly fair premium 10% time 10,000 is a th000 the ACT early Fair premium would be $1,000 suppose the insurance company insured a thousand people like that they take a $1,000 from a th people we said that the bad event occurs 10% of the time with enough insues roughly how many people will the insurance company pay out to there's a thousand people 10% chance of an accident how many people are likely to get into the accident 10% of a thousand is 100 and so they're going to pay $10,000 to 100 people right and so they're going to get uh that's going to be $1 million they're going to pay out but they will have charged uh $1,000 to a th000 people they're going to have a million dollars of of of of premiums to to use the actu fair premium is a situation where the insurance company is breaking even there's no load there's no profit they're just taking money in as premiums they're paying that out in expectation that's the actu fair premium can we back you said that you could make payments even during bad periods yes you I mean if I had got injured the job I I'm um your paychecks would you know anymore right so workers comp you can think of it this way that the premiums are adjusted so that part that you wouldn't pay it when you're in the bad state is we're talking today about this true workers comp there's no paycheck you're they're not deducting your workers comp fee but you could think of the premiums as being inflated to cover that but today we're not going to talk about any like actual Insurance market right you're also not playing paying UI when you're unemployed so we're not going to talk about any actual social insurance program today today we're going to talk about a very stylistic Insurance world so that we of fix the fundamentals we have the vocabulary down but yeah I mean you always pay the premium is true of the problems you'll do in this class is the way to think about it because uh otherwise we have to address the premiums in the good state of the world uh such that they cover the bad state of the world which is roughly what happens in reality and also there's some just sort of government payout in these programs that isn't necessarily insured the other way to think of it but um in this class invol problems you pay the premium in all states of the world okay but thank you those actually you when you guys have questions like that it's terrific because there's like a world in which I'm painting for you which is totally unrealistic and it's good occasionally to be reminded how that departs from reality so when you have questions like that it's really great it's terrific okay let's do another example of the actuar affair premium the probability of an accident here is 1% so this is important it's not just what you lose when you have the accident it's your total consumption level in each state of the world because there are there will be problems where you have $100,000 of poent of consumption in the bad state of the world you lose $20,000 in the good state of the world you don't right so you have to calculate utility with 100 versus 80 if there's no insurance right does that make sense to everybody it's not just what you lose it's cuz the the utility functions we look at have diminishing marginal utility so if if you don't use the right level of consumption will'll get the wrong answer okay so this is in this in the no state of the world accident you consume $50,000 in this case your full consumption is wiped out if you have an accident you lose the $50,000 so the actu fair premium here and so in in the case of full insurance where you get a pay out of $50,000 the actu fair price of this insurance policy would be 1% times $50,000 also known as $500 right everyone with me good so the insurer breaks even collecting $500 to save from 100 people and paying out one of them will on average get into an accident and they'll pay them $50,000 they've collected $50,000 they'll pay out $50,000 the insurer breaks even okay so I'm going to run through some insurance Theory results individuals mer okay we're going to talk about risk aversion more in a second but individuals value insurance because of diminishing marginal utility the fact that your 50th piece of pizza gives you less utility than your third piece of pizza is the whole reason you want Insurance because remember diminishing marginal utility was the reason you wanted to smooth consumption between period one and period two it's the same reason you want to smooth consumption between the good state of the world and the bad state of the world it's all the same thing we'll talk more about it in a second full insurance equalizes utility in all states of the world you're fully insured you have flat consumption again in good times and bad times you have flat utility in both states of the world the key result is that with actu fair pricing individuals will want full insurance we'll talk we'll do a numeric example of that in a second with actu fair pricing you want full insurance you want no risk full insurance is the efficient market outcome if folks are left with less than full insurance or no insurance at all and they would want Insurance that's considered a market failure the market do failed to provide the efficient amount of insurance to agents in the market okay let's now we're going to talk about the expected utility model so this expected utility is the way we think of an agent's utility over risk over an uncertain set of outcomes suppose p is the probability with which the bad event occurs in this case so the accident occurs probability P your expected utility and there's two levels of consumption your level of consumption when you have an accident CA a your consumption when you don't have an accident CA Ben your expected utility over these two states of the world accident no accident is simply the sum of your utility in the accident case multiplied by probability there is an accident P plus your utility in the no accident case so U of C to Ben times the probab probability there is no accident which is simply one minus P we're always talking about binary situations there either no accident or accident it's simply the sum of this two utilities waited by the probability of each of those outcomes notice that we're not expected utility is not expected consumption right we're not waiting consumption by probabilities and adding them up we're waiting utilities you have to plug the consumption level into the utility function to figure out your utility in each state of the world and weight that by the probabilities and some every youone see the distinction we we want to use the this is expected utility not expected consumption suppose our utility function took the form of U of C equal to C to the 1/2 IE square root C right that's our utility function if we have a consumption level of four our utility is two it's just a square root of consumption let's figure out what their expected utility in a few different situations is let's first do our expected utility without any insurance if we Face the full risk of the gamble of the accident so our so again this is the same situation where our consumption in the no accident city is $50,000 but if we have the accident the full $50,000 is wiped down okay so with probability 1% we have a utility of 0 to the 1/2 right with probability 99% we have a utility of $50,000 to the 1/2 to the one2 you have to do UFC so in that case your utility level is 22.375 for $25,000 of coverage so in the bad state of the world occurs we have an accident we lose $50,000 of consumption we get $25,000 of payout from the insurance company but we still pay the premium right of $250 so and this is a case where with probability 1% we have the accident so we we have a utility level of 24,750 to the 1/2 right and with probability 99% we just pay the premium and have 49750 to the 1/2 in utility the weighted average comes out to be 222.000 for $50,000 of coverage this is full actuar Fair insurance so with probability 1% you pay the premium you with probability 1% you have the accident your $50,000 asset is wiped out you get a $50,000 payout from the insurance company but of course youve paid the premium as well so you have a you have a consumption of 49750 you have an utility of 49,000 sorry 49,500 you have a utility of 49,500 to the 1/2 and that happens with probability 99% if the premium is higher here because the insurance is higher here with 99% you have no accident would you pay the $500 premium this is full insurance your utility level in both states of the world is exactly the same full insurance and so your utility ends up being in this case 22249 so is your utility higher with full insurance or partial Insurance full insurance because it's all actu fairly priced we know this person would strongly was going to prefer full insurance to all other options EU is highest with full insurance is because it's a it's um actu fairly priced now let's talk about risk aversion risk aversion is the extent to which which an individual is willing to accept a lower payoff in exchange for certainty is what you're willing to give up in order to not face risk risk aversion in models where utility UFC is concave concave simply means that the slope at low levels of consumption is steeper than the slope at higher levels of consumption that the slope goes down with more and more consumption what's another way we describe that three-word phrase first word starts with a D di marginal utility exactly diminishing marginal utility because if this is the utility function I'm plotting here the xaxis is consumpt and this is U of C maybe goad and label this U of C is the y- axis C is the xaxis what does the slope tell us in that case marginal utility right the the slope is going to tell us marginal utility and what's happening to the slope of this curve it's getting smaller it's diminishing marginal utility is diminishing as we go from left to right the same is true of that curve they both exhibit diminishing marginal utility in other words both of these utility functions feature risk aversion so in models where UFC is concave if an individual in individuals is risk averse with payoff with with respect to any gamble more curvature is also going to mean more risk aversion so this is a curve of this is the plot of a curve of the natural log Ln that's the square root so this is where U of C equals lnc this is where U of C equals c to the 1/2 this one has more curvature than this one what does curv curvature really mean it means that the slope is getting flatter more quickly we start off with a steeper slope and it gets flatter faster that's all curvature mean curvature means it looks more like a c right looks more like a c than like a up and down than a straight line so the more curvature the more risk aversion what I'm telling you is that the ratio of the margin utility of the first unit of consumption to say the 10th unit of consumption the margin utility of the first unit of consumption divided by the marginal utility of the 10th unit of consumption is a higher ratio for this curve than that curve this one is more curved it has more curvature cuz what I'm telling you is that the margin utility drops off faster over here so if there are two states of the world the good state of the world and the bad state of the world the good state of the world is where you're all the way out here the bad state of the world is when you're in here the same would be true there right the same points on the x-axis I'm saying that that is more painful to you if you're over here than over there because the marginal utility you're getting from having lots of consumption is really low and the marginal utility you're getting from very little consumption is really high in this case more than that case what do we want to do when we smooth consumption equate marginal utilities so in this intertemporal savings model how do we transfer consumption from period one to period two what do we do we save right we save part of our period one income and transfer it to period two through a savings vehicle in the same way in this model where we're smoothing across states of the world we transfer income from the good state of the world to the bad state of the world through through insurance we give up consumption in the good state of the world in order to get more consumption in the bad state of the world that's what insurance is we pay the premium all the time sure but the bigger the premium the more the insurance right we're transferring consumption from the good to the bad by insuring more the more curvature your utility function has the more Insurance you're going to demand because you're more risers the three following statements are all the same thing faster diminishing marginal utility more curvature in your utility function faster diminishing marginal utility more curvature in your utility function more risk averse so I'd like for you all to go home and think a little bit about this think about what I was saying about equating maral Utilities in the two states of the world what that what having more curvature means in terms think about this a little bit I want and um I'm going ask Vincent to talk about it with you again next week after you've had some time to think about it think hard about it remember stuff I like rears its ugly head again right yeah yeah so I like that stuff okay so I'm going to say it again in words risk aversion measures the extent to which an individual is is willing to Bear risk the more risk averse you are the less inclined you are to Bear risk the more you're willing to pay to get rid of risk risk averse individuals have rapidly diminishing marginal utility of consumption they are very afraid another way to say this is they're really afraid of consumption falling in the bad state of the world they really don't like low levels of consumption in some states of the world individuals with high risk aversion will buy insurance even if it's priced at more than is actly fair because they love insurance right the risk premium is the amount that risk averse individuals are willing to pay above the actu fair price okay so first let's talk about adverse selection for a second so so far we've talked about there being an agent a driver Etc there are lots of people and we're all different right when it comes to healthcare insurance we all have different health risks some folks are young and come from families that don't have chronic conditions and they're less likely on average to have high medical expenditures some people come from some people are older which makes them more a risk for medical expenditures they come from families that have uh a common trait of chronic diseases right some people are really safe and some people are evil can eval right they make choices that make them uh at higher risk for for medical expenditures suppose we compare you know a daredevil to someone who's not but they look the same they are the same age they're the same height and weight they are this they work the same job everything you can see about them except for what they do with their weekends is the same right but one is actually going to have much higher higher medical expenditures they like to jump off buildings on the weekends right like do crazy stuff all the time but you can't see that in them right so these are people we think of them as having heterogeneous risks all people have somewhat heterogeneous risks right asymmetric information means that one side of the market has information that the other side of the market doesn't so in the case of let's call the risky guy evil coneval and his brother who's really safe right uh in that case they know right evil conal knows that he does crazy stuff right and imagine his name is an evil conal he's like some secret evil canil right you can't tell from his name that's asymmetric information because he has this private information about his healthc care risks his Healthcare expenditure risks that the insurance company could never see right he knows that he has crazy stuff he's going to be really expensive to care for that's an example of asymmetric information one side of the market has more information than the other adverse selection means that so when the insurance company off a really generous insurance plan evil can evil is the first in line right because he knows regardless of what they're charging he's going to want that insurance he's going to have four operations this year right he knows this he wants really generous Insurance adverse selection just means that when a product is offered there heterogeneous risks right when Insurance product is offered and there are heterogeneous types the people who show up are unlikely to be representative of the population at large people who demand Insurance are less less likely to be the lowrisk type the more risky type are more likely to demand Insurance because it's worth more to them the lowrisk types are not less likely to show up in other words adverse selection means that individuals with the highest risks are most likely to want Insurance thus insurers charge a higher premium than is actuly fair for the population at large which causes lowrisk people to forgo insurance so if I was trying to ensure all of you right if I knew the average medical expenditures of all of you I sort of had your history from last year and I try to charge a premium for you lowrisk types who are also not that risk averse you probably wouldn't want in right cuz I'm going to charge the flat premium that's across everybody you're the lowrisk guy it's not a good deal for you you're going to opt out which means that the people who buy my insurance are actually going to cost me more than I expected them to so I'm going to jack so knowing that I I can see that I've taken this class right so I know that so I'm going to set that initial premium higher than it's actu fair for this classroom and then the low type is definitely not going to go is definitely not going to go forward maybe the next lowest type is not going to go for it etc etc so I keep jacking up the premium we I get less and less of the market eventually I might charge a premium that is actuly fair for that one really high-risk guy but who does anyone else want to pay that premium no it's fair to him he'll buy it he'll get full insurance but do we have a market failure yeah because no one else has insurance right that's where this so that process of the really high risk types only buying insurance as the premiums go up and then only the even higher risk types want to buy insurance next year and the premiums go up that's called a death spiral cuz eventually the market fails it fails almost everybody except the highest risk types premiums are super high it only covers the sickest of people um if they can afford it right if they can actually afford the premium which is another uh which is another issue when it comes to insurance is like ability to pay versus uh risk type but let's assume everyone can buy the insurance for today alone let's make that assumption I'll only be ensuring there's really high risk guys okay there's two kinds of equilibrium so we just talked about a separate equilibrium as asymmetric information does not always cause market failure in fact it doesn't so just now I give you an example of a separating equilibrium where everybody but the highest risk type dropped out and I was only ensuring the highest risk type right okay but that doesn't always happen there are cases or situations where the lowrisk type knows that the the premium is above what's actuly fair for them but is still willing to buy insurance what is true in that case the low risk type is very risk averse when the low risk type is also very risk averse he or she is also willing to buy the non actuar fairly priced for him or her pre insurance policy they're willing to pull with the high risk type the insurance company is pricing for the higher risk types but the low risk type is willing to buy as well because they're so risk averse they're willing to pay a premium to get insurance that's a case of a pooling equilibrium because the lowrisk type is pooling with the high risk type because of their level of risk aversion all types by full insurance even though it's not actuly fair to low risk lowrisk types this is not a market failure everyone is insured is there some cross subsid subsidization going on yeah low types are paying more for insurance than they would if their insurance was actuar fairly priced but that's not market failure that's Equity that's not efficiency right they're subsidizing the highrisk types but they're getting full insurance so pooling equilibrium is is efficient when it comes to the market there's another kind what we just talked about before separating equilibrium which where the higher risk types are buying full insurance but the lowrisk types are not sufficiently risk enough to want to pay the higher than actuly fair price so that's a situation where I keep bidding up the premiums and the lower L types keep dropping out right in the end only one guy the high risk type highest risk type is insured everyone else is uninsured that's Market inefficient because people want Insurance there's a quantity Gap right any situation where some people lack insurance and would want to and would want insurance or not fully insured is a market failure because there product not being supplied because of asymmetric information the source of that market failure is a symetric information why is it a source of market failure CU suppose I know that I have a family trait for some disease right I know it and I'm willing to go to the insurance company and say hey Hey listen I know I need more expensive insurance I have this blood test I know we're all even you've seen my blood work I have this trait I'm more likely to get this disease charge me more I want to buy the insurance why is the insurance company going to believe me sure I'm telling them about this disease my extreme interest in insurance makes suggestive that maybe I know that my medical expenditures will be even higher than that right no matter suppose instead I am the low-risk type I have no medical history of illness I you know cross cross the street only after checking both ways three times right I wear my seat Bel when walking right I am the lowrisk type there's no way for me to prove it right because I can go I can show them video of me driving and I can show them video of my blood work all there's no way for me to cred proved to the insurance company that I'm the low risk type that I'm the lower risk type than what they think I am and that is asymmetric information and that's why there is this uh source of market failure that that inability for both for the market for the information to be fully shared leads to the market fail failure that leads in a separate equilibrium to some people being uninsured and that's the market failure if we have high risk averse of low types risk averse enough lowrisk types then we have a p glue room and we're fine we're fine okay so I'm going to go through you know what I'm gonna save all of this for next time because that's what the other class did and that's fine we have we have some slack in the next lecture but I'm also going to build in so I get the sense that you guys really like the practice problems we do in lecture right they help you kind of do a problem while you're like cuz I feel like if we don't do problems in class you walk out of here feeling like you got it only to learn later that maybe you're 10% confused so I'm going to add some practice problems I think for next week we'll turn some of these into practice problems so that we can do problems together so when you come in next week do me a favor review everything we've covered so far and that way we can do we can start exactly where we left off okay so let's get ready for our discussion uh please switch seats as as is needed um let me get the names and don't worry all of this will be cut out of the video none of this will be posted um when it's online okay so today is Valerie Diego sherz tall um Teresa is it Teresa or Teresa Teresa Teresa um Mana tresa Mar uh Kelly and vendra so oh you guys have done this okay you guys probably came in with this in mind nice work um okay so this week it was two articles the porter article and the Norris article okay so what do you guys think do you think the current proposals are on the oh sorry sorry I thought you were blocking the light um so you guys think the current proposals are on the right track Mana no I at least based on the sorry the Norris article just G the election time frame a lot of the proposals are very you know high level very ambiguous they don't really have any teeth and they're not really focused on making the changes that actually need to happen Okay so they're discussing some stuff but at this vague level and maybe not with the right goals in mind Valerie I I would rather go with the arum article okay especially with the c saying about the ratio ofal Deb to to I mean GDP so like in 10 years it would be 100% of the G so for me it's like a pretty straight you know pretty straightforward analysis that shows a clear Trend towards something not really good and you don't think the policies being proposed are really addressing that Trend yeah I mean they think they trying to fix some pole but it's not really something substantial okay and and another point I to make is from the scho for what I'm sorry Mr oh yeah and I think you were making a good point when you're saying that you there's like a school for taxing really high income people a lot moreing that's what he thinks yeah yeah he thinks that there's there's some role for that t you had a point yeah just the only last class we talked about 2003 where they did this research dynamic dynamic scoring yes way to tie the last lecture in extra points and they found out that you know High raising the tax rate is not really going to you know solve all the problems and it's not going to ruin the E economy so you mean cut all three analysis are about cutting tax rates yeah didn't yeah didn't enhance the economy as so you're saying the reverse we okay got it got it yep interesting excellent uh other points if you look at like both arguments one is kind of very unilateral in the sense that we need to cut taxes right and the other one is kind of like having a bit more of a balance approach which makes more sense but neither are giving enough specifics to really say okay this is the way to go okay um if you look at um the article where it talked about what you know Obama is trying to raise 2.4 trilon over right that makes sense but at the same time it's kind of like how is he going to do it and it doesn't seem like it's very apparent but I think the key point is to raise tax right or to raise revenue right whether that's cutting tax expenditures or cutting spending on the other side it's somehow it seems like we might someday need more revenue or some more net revenue right whether what side it comes from um vendra yeah especially in the second article he talks about taxing the highest income earners and really raising the tax rates like uh he gives two examples like in the Cs uh the tax rate was almost like 70% for the riches in America so he says that um if you tax them that will definitely generate more Revenue he even says that okay people might evade taxes uh he give instances from uh Britain that people uh he said you know a lot of people move to Switzerland and everything to a taxes but then he say again you know these kind of measures are temporary people can't like move to uh Switzerland forever yeah so what I thought was interesting about that so I think actually people can move to Switzerland forever this is me not agree with because I mean Switzerland's lovely no but I mean I think people I think part of it is that once people have moved to Switzerland you might have gotten all your your movers your elastic part of your population may be gone and who's left at that point may not be so willing to leave CU they would have left you know you've sort of gotten the people who are willing to leave there're their home country and go live elsewhere that's what I would interpret that as but that's I mean I don't know he's I found it surprising for him to think that they would come I don't think you some people do come back right but the idea like especially in Europe right like Switzerland is not it's not that crazy it's not that crazy to do but um but anyway go ahead yeah so I kind of supported that if you tax the highest income earners at a really high tax rate and cut cut down the tax preferences like uh capital gains and things like that really increase the revenue okay but so so I'm going I'm going so go ahead okay so because I want I want I want to ask the group of question based on what you just said but go ahead first I think they were saying that to increas taxes ACR the everyone butre taes to theual at a higher percentage and that way to improve our Revenue but also they were saying to not only to increase taxes but to eliminate as reduce the tax expenditures on what those are to what degree and to ensure that there isn't a even don't even if we don't eliminate those people still I signicant of tax right to just tax everyone across the board and to have a bigger to Tilted more right so do do you guys support this idea of increasing tax to the top more what does that mean do you mean increasing uh progressivity of the ordinary income tax or do you mean taxing investment income more what do you mean I think there's just more money that you can kind of squeeze out of the people at the top of the who are paying most of the taxes I think that an important point is like if you look at the whole after curve argument right I feel like you know it's all about like the middle ground right so you don't have to necessarily you know tax it 70% but if you can even get back to you know a few percentage points like where you were a couple years ago right the thing is you don't know where that Peak is no we don't yeah so the thing is I think that it's worth experimenting I think that it's become such a kind of like politically charged discussion that people just kind of are ready to just kind of look the other way that's why I feel like you're not going to get anywhere saying okay let's cut taxes you're not going to get anywhere saying let's get back to 70 you have to kind of get back to okay well let's start back where where we were a few years ago okay and then work from there you know okay that's one point T well I think the discussion since we're talking about top income earners most of their money is not income tax so and you know different things so it's a very difficult tension on the one hand like did we really want um you know investment to increase on the one hand on the other hand we want the money that these top income earn to go to government revenue um that's one point I mean that this tension is something that you know is hard to resolve another point is I think that the discourse about you know cutting taxes politicians you know they don't really say anything about you know government revenue welfare you know how to it's become popular every every few years to talk about cutting taxes right but no one talks about cutting I mean some people talk about cutting spinning but there's not enough specifics it's part what one of you said and so it's we keep talk the conversation is always the same right okay so what if I told you guys that capital income is thought to be more mobile or more elastic than labor income would your reactions change I think there's no right or right wrong answer right this is the one part of class we still about feelings thatal in es right so I guess there's a risk of it going abroad or you know moving elsewhere so that is a sort of vital part of improving or of the US economy so you wouldn't want to push it all away but you might want to start of temper yeah you defitely need to temper it I mean it is right now at least it is I think T said concentrated at the top um if there was a way to make kind of all levels of income more more part of capital investment that would probably be beneficial it might be improve horizontal equity in some way to if they if we continue to tax advantage it yeah other points I think it's a delicate balance and I think what you have to be careful of is you have to be more concerned really people at the lower end of the who pay less taxes because I know there was an example like book where in 90 where you know Margaret Thatcher's government y the right I mean people you were they were killing people in the streets right and I mean you you have I mean so sh worries about Revolution no exactly and I mean I feel like now more than ever it's more and more of a reality so I mean you don't want people on the streets so to the extent that you know if you go back to 39% people AR in the streets I think we can stomach it so maybe it's a question where so I'm going to tell you this one fact so the income distribution is more concentrated at the top than ever before right so by in tax at the top will get more Revenue than we ever were able to before but I'm going to tell you there's not that much revenue there shockingly a middle class like raising middle class taxes a little is you know there's very it's very difficult to balance the budget on the backs of the poor and Rich alone right cutting lot to it's actually hard right we're going to have to change how the middle class interacts with the tax system it might be closing expenditures it might be raising tax rates it could be something but that's why this is a hard conversation right is that it's really fun to pick on people who you think are not this vague middle so I'm gonna open it up to the group anyone have a point they want to make you guys can make points too but uh Jeff flight um basically countries throughout the world are suffering from over exp and by putting more penalties and more cooperation among countries or with I'm sorry what across countries you said yeah more cooperation amongst countries and increasing penalties for reporting income that America makes has should be reported should be yeah I mean your Swiss bank accounts are technically supposed to be reported to the US government right I mean your because all of you have one right um yeah any swis bank account should be reported yeah reporting be you so increasing penalties with international corporation cooperation it's something you would go for MRA so you say like there's no other there's no way that we can actually we can but we we we can but there's just I mean there's a limit to how much you raise like it's it's it's a pot but you know we're taxing it pretty heavily already right and there's only so much money there's a lot of money in the broad middle um I'm sorry Andre Andrew I'm sorry Andrew I think the question I just think of you as Time Master sorry I think the question is then how do you grow the middle class is that something you can do with the tax to have more income in the middle class interesting that's like a long-term project yeah yeah but it seems like the better just kind of constantly complaining about who's getting tax who's not getting tax to think about what we're doing on the spending side where the investment where are we putting our spending dollars right and are we investing in the middle class is what you think of middle clig okay um other points uh Kelly then Valerie and then T and then we're gonna maybe do one more class eom so I mean this is still time series type stuff like you it's hard to say for sure this seems to be like what the model suggest etc etc there's no evidence that that happens is the way to put it yeah there's no evidence that decreasing taxes led to more economic growth um but this is like almost very recent newss butc just think the best part you know it's just it seems like we're raising revenue for more bandaid Solutions and so that's kind of like I think that these policies ta policies to grow the pie our spending should be more aimed at growing the pie in your word in your world um Valerie I think she got it for you and then tall I think you were next ELC I mean yeah that it's they ta talking this is and it's just it's stalky I mean they're they welcome to the Brave New World of multinational tax right it's it's companies live across borders some people do and they're hard to tax but those stuff that's in the US we can we know where you sleep right and we tax you according so tall wants to bring corporate taxation to the Forefront of American tax policy but I also think that compies are richer countries these days but people sorry what are they need the Supreme Court needs many economics lessons in my world but I'm not saying this court I mean all courts I mean all of them together but this is great so I so I will tell you this our next one will probably be about spending stuff I mean much to my dismay um but it'll be more about spending stuff but um I hope that these discussions and reading some of these outside article say uh made tax policy something you think of as more interesting than you did maybe walked in um and so I hope tax policy is alive in your life like it is in mine is this a one point I think we have to go but uh wanted to know your view point like what do you support like tax taxe or inre I'm ready for tax reform you know it's time to figure out you know I actually think the American this is me being uh honest I think the American people people are a lot more reasonable about this stuff than our politics makes it seem I think our politics makes it seem like the American people only have this end appetite for tax cuts and tax cuts and tax cuts but I feel like if you you know people look at the deficit and the debt and they're like yeah you know what that's really big and I think if we had this very honest conversation where more people actually represented their their their voters and we said you know we got to cut spending we got to raise taxes we have to figure out what the right ratio is through honest negotiations I think there was a debt deal on the table for 2 to1 spending cuts to tax increases I mean is two to one my number no but if that's the outcome of negotiation I could live with that right but now we live in a world where you know I think so that two to one means a third of it coming from tax increases right and uh we we have a world where people say you want a third from tax increases how about 20% tax cuts instead and let's meet in the middle at zero right and that's really to me I mean that's my politics but um I also am very sensitive about taxing certain kinds of things you know and I have my crazy views about integrating the corporate code and all this stuff but uh you know I think I think I think we're in a hard spot as a country and it's very hard to imagine cutting anyone's taxes at this point and I mean I'm talking about low-income people middle class people no one's taxes can go down anymore we've got to pay off we got to pay off or we we have to spend less and we got to pay for it better is my opinion but hey that's that's opinion