part 2

• 21. Median voter theorem - suppose voters decide by direct vote the amount of their town's expenditures on local police. Why will the result probably reflect the preferences of the median voter? And who is the median voter in this context? 

  -       The result of a direct vote, like a referendum on local police expenditures, is likely to reflect the preferences of the median voter. The median voter is the one whose preferences lie exactly in the middle when voters are ordered by their preferences. Politicians often target policies appealing to this voter to secure electoral support.
• 22. In indirect democracy people vote for their representatives and only then the representatives vote for different proposals. However, the median voter theorem has also its relevance in indirect democracy. How can the preferences of the median voter have any influence under indirect democracy?

  -       In indirect democracy, representatives are elected based on voters' preferences. The preferences of the median voter can influence the selection of candidates and the subsequent voting on proposals. Politicians may adopt positions that align with the median voter to gain electoral support.
• 23. Rent-seeking means using the political system of the country to redistribute legally income in one’s own benefit. How can this be done? (hint e.g., give an example of some regulation) 

  -       Rent-seeking involves using political influence to secure special privileges or government regulations that benefit a particular group. An example is when a company lobbies for regulations that create barriers to entry, limiting competition and ensuring higher profits.
• 24. Rent-seeking often has a form of a regulation, which artificially hinders competition. Why is an artificial reduction of competition considered as rent-seeking? What consequence does it have for the total wealth of the society?

  -       Artificially reducing competition through regulations is considered rent-seeking because it allows firms to secure economic rents without providing corresponding social benefits. This can lead to inefficient resource allocation and lower overall wealth in society.
• 25. Cost benefit analysis is a set of methods for assessing the net benefits of a possible public investment. Estimates of both costs and benefits must, however, be discounted. What does it mean? How is discounting made? 

  -       Discounting in cost-benefit analysis involves adjusting future costs and benefits to their present value. It accounts for the time value of money and reflects the idea that a dollar today is worth more than a dollar in the future.
• 26. For discounting the costs and benefits within the cost-benefit analysis a social discount rate is to be used. What social discount rate (optimally) should be used?

  -       The social discount rate used in cost-benefit analysis should ideally reflect the opportunity cost of using capital in the public sector rather than the private sector. It is often based on the rate of return on alternative private sector investments, considering the foregone benefits of using resources elsewhere in the economy.
• 27. In cost-benefit analysis often one of the benefits is time saved e.g., due to a construction of a new road, railway etc. How can the value of the time saved be estimated? 

  -       The value of time saved can be estimated using various methods, such as the travel cost method, stated preference surveys, or revealed preference approaches. These methods aim to assess how individuals value their time by observing their choices in different scenarios.
• 28. Some costs and some benefits are potentially endless (e.g., maintenance costs). Is it possible to estimate the present value of this potentially endless stream of costs/benefits? 

  -       Yes, it is possible to estimate the present value of potentially endless streams of costs or benefits using techniques like perpetuity formulas or discounting. While the stream may extend indefinitely, discounting allows us to capture its present value by assigning lower weights to future values.
• 29. Suppose that a given project improves the life of people living in a given area by making it more accessible and it saves their time spent commuting. This raises prices of houses and apartments in the area. Should the rise in property prices be included in cost-benefit analysis as a kind of benefit? 

  -       The rise in property prices can be considered as a benefit in cost-benefit analysis since it reflects an increase in the value of assets owned by individuals in the area. However, it might also be important to consider distributional effects, as not everyone may benefit equally.
• 30. In insurance often a problem of adverse selection emerges. Suppose that health insurance is voluntary and only those who want to get insured buy insurance. What would “adverse selection” in the context of health insurance look like? 

  -       In voluntary health insurance, adverse selection occurs when individuals with higher health risks are more likely to seek insurance. This can lead to an imbalance in the risk pool, resulting in higher premiums or decreased coverage.
• 31. Compare the problem of adverse selection in health care insurance in case the insurance is obligatory with the case when insurance is voluntary. Where is the adverse selection problem more serious? 

  -       Adverse selection is generally more serious in voluntary health insurance because individuals can choose whether to participate. In obligatory insurance, everyone is required to have coverage, reducing the scope for adverse selection. If the price is too high, no one will buy insurance and market will disappear. 
• 32. Sometimes the problem of adverse selection can destroy a whole segment of the insurance market. How can this happen? 

  -       Adverse selection can lead to the collapse of a segment of the insurance market. If only high-risk individuals seek insurance, premiums rise, making it unaffordable for low-risk individuals. This can result in a market failure or the exit of insurers from that segment.
• 33. Moral hazard is along with adverse selection a traditional problem in insurance markets. How could the moral hazard look in the context of health insurance?

  -       Moral hazard in health insurance refers to the tendency of insured individuals to take on more health risks or consume more healthcare services because they are protected from the full costs. This behavior can lead to increased utilization and higher overall costs.
• 34. Health care market is from many points of view specific and different from other markets, e.g., there is quite often a strong information asymmetry. Between whom? Is it possible to overcome this asymmetry? 

  -       Information asymmetry in health care often exists between patients and healthcare providers. Patients may lack the medical knowledge to fully assess treatment options. Efforts to overcome this include informed consent, second opinions, and transparency in healthcare information.
• 35.  Technological change in health care has a somewhat different character than technological growth in industry. What consequences does it have? 

  -       Technological change in health care can lead to improved treatments, increased life expectancy, but also to higher costs. New technologies may be expensive initially, contributing to the overall rise in healthcare expenditures.
• 36.  What are the main driving factors behind the growth in health care expenditures?

  -       Key factors include technological advancements, aging populations, increased prevalence of chronic diseases, expanded access to healthcare services, and changes in healthcare delivery models., lack of productivity gross.
• 37. Aging of population is one of the drivers of healthcare costs growth. But does real income per capita have some impact on healthcare expenditures? 

  -       Real income per capita generally has a positive impact on healthcare expenditures. As incomes rise, individuals and governments may be willing to allocate more resources to healthcare, leading to increased demand for healthcare services and technologies.
• 38.  There are two main types of pension systems: one is the funded pension system and the other a so-called PAYG. What is the difference between the two?

  • In a funded pension system, individuals contribute to individual accounts, and their pensions are funded by the returns on these contributions. In a PAYG (Pay-As-You-Go) system, current workers' contributions fund the pensions of current retirees.
• 39. In the PAYG system, current pensioners receive money from current workers. Such a system has several “parameters”. Depending on the value of the parameters the system may or may not be in equilibrium. Give examples of the parameters of the PAYG system.

  - Examples of parameters include contribution rates, retirement age, the ratio of workers to retirees, and the benefit rate.
• 40.  One of the parameters of the PAYG system is retirement age. How does a change in retirement age affect the equilibrium of the PAYG system?

  - An increase in retirement age can positively impact the equilibrium of the PAYG system by reducing the number of pensioners and increasing the number of workers, thus improving the worker-to-retiree ratio.