part 3

• 41.  For the stability of the PAYG system the demographic structure of the population is important. Why is that so? 

  • The PAYG system relies on the contributions of current workers to pay the pensions of current retirees. Changes in the population's age structure, such as an aging population, can strain the system as there are fewer workers contributing relative to the number of retirees.
• 42. Suppose that the PAYG system in a given country is out of equilibrium and according to projections it cannot return to equilibrium in future. What would you suggest to the government to do?

  • If a PAYG system is out of equilibrium and projected not to return, the government might consider adjusting parameters, such as increase contribution rates or retirement age, or reduce benefit rate. Alternatively, transitioning to a more sustainable pension system, like a funded system, may be considered.
• 43. In a funded system people save up money for their own pension so that the system is not so dependent on demographic structure. However, the funded pension system has its own risks. Name some of them.

  - Risks include market fluctuations affecting investment returns, inadequate savings, and longevity risk, possible fraud. Economic downturns can negatively impact fund performance, affecting retirees' income.
• 44. The biggest problem of unemployment benefits (unemployment insurance) is moral hazard. How does moral hazard manifest itself in the context of unemployment benefits?

  - Moral hazard in unemployment benefits manifests when individuals are less motivated to actively seek employment, knowing they have financial support. This can lead to longer unemployment spells.
• 45. The duration of unemployment is probably influenced by unemployment benefits. Why can sometimes a longer duration of unemployment benefits be better both for the unemployed person and for the society as a whole?

  - A longer duration of unemployment benefits can provide a financial cushion for individuals to search for better job opportunities or retrain for new skills, contributing to better matches between workers and jobs.
• 46. There are two ways of thinking about income inequalities: about relative and about absolute inequality. When thinking about the relative inequality, the inequality can be characterized by a so-called Lorenz curve. What does it look like and what does it say?

  -The Lorenz curve is a graphical representation of income distribution. It shows the cumulative share of income received by the bottom x% of the population, highlighting income inequality. The greater the distance from the diagonal line of perfect equality, the higher the inequality.
• 47. When thinking about absolute inequality, the income of households is compared with a poverty line. However, what is the main problem of this notion of absolute poverty?

  - The main problem of absolute poverty is setting an arbitrary poverty line. Different regions or countries may have different costs of living, making a universal poverty line challenging to establish.
• 48. Families can be compared according to their income or according to their wealth. According to which variable is the inequality in society more serious? And why is that so?

  - Inequality in wealth is often considered more serious as wealth represents accumulated assets, providing greater economic security and influence. Income inequality, while significant, may not capture the full extent of economic disparities.
• 49. Suppose that according to the Lorenz curve, which shows the size of inequality in the society, the 10 % of the richest receive 60 % of income. Is there a way the government could reduce inequality?

  - Reducing inequality could involve progressive taxation, targeted social programs, or wealth redistribution policies to address disparities and promote a more equitable distribution of resources.
• 50. Welfare programs in fact provide insurance against poverty. As in other insurance markets the problem of moral hazard emerges. What form does the moral hazard take in case of welfare programs?

  - Moral hazard in welfare programs occurs when recipients reduce their efforts to become self-sufficient because they know they can rely on welfare benefits. It may discourage active job-seeking or skill development.
• 51. Governments try to overcome the moral hazard problem connected to welfare programs e.g. using so-called ordeal mechanisms. What is that?

  - Ordeal mechanisms are measures used by governments to discourage underserving individuals from accessing welfare benefits. These measures may include administrative hurdles, means tests, or work requirements to ensure that only those genuinely in need receive assistance.
• 52. When thinking about tax fairness we can distinguish between vertical and horizontal tax equity. Explain the difference between the two.

  -       Vertical tax equity refers to the idea that individuals or households with higher incomes should pay a higher proportion of their income in taxes. It addresses the fairness of the tax burden relative to one's income level. Horizontal tax equity focuses on treating individuals or entities in similar economic situations similarly. It aims to ensure fairness among individuals with similar income levels, regardless of other characteristics.
• 53. There are several kinds of taxes according to what they are imposed onto. Try to name a few. 

  -       Income tax, Sales tax, Property tax, Excise tax, Value-added tax (VAT), Corporate tax, Payroll tax
• 54. What is the difference between (gross) income and a so-called taxable income? Give examples of some items, which make up the difference between these two kinds of income.

  -       Gross income includes all earnings before deductions, such as taxes and other expenses. Taxable income is the portion of gross income that is subject to taxation after allowable deductions. Examples of deductions include business expenses, mortgage interest, and contributions to retirement accounts.
• 55. Tax systems can be progressive, proportional or regressive. Explain the difference between them. 

  -       Progressive Tax: The tax rate increases as the taxpayer's income increases. Higher-income individuals pay a higher percentage of their income in taxes. Proportional Tax: Also known as a flat tax, it imposes the same tax rate on everyone, regardless of income. Regressive Tax: The tax rate decreases as income increases, meaning lower-income individuals pay a higher percentage of their income in taxes.
• 56. Suppose that the individual income tax is progressive with several tax brackets. Further suppose that in a given family the husband earns income, which is so high that it falls into the highest bracket while his wife has a modest earning, which falls into the first bracket only.

  -       Taxing each member individually may result in a higher overall tax burden. Taxing the family as a whole or splitting the sum and taxing individually can be more favorable, depending on the specific tax brackets and rates.
• 57.  What is the difference between statutory tax incidence and the economic tax incidence? 

  -       Statutory tax incidence refers to the party legally responsible for paying the tax, while economic tax incidence considers who ultimately bears the economic burden of the tax. Economic incidence can shift depending on the elasticity of supply and demand.
• 58. Suppose the government imposes an excise tax on consumption of every bottle of wine. The tax is of ad rem type, i.e. it is imposed on every bottle as a given amount of money. The statutory incidence is on the side of the sellers. Show on a graph, what will be the consequences of such a tax. 

  -       A graph would show an upward shift in the supply curve, resulting in an increase in the price paid by consumers and a decrease in the price received by producers. The quantity traded would likely decrease, indicating a reduction in the market.
• 59.  Suppose that the government imposes an ad rem tax (i.e. tax per every unit of consumption) on every box of cigarettes. According to the law the producers have to pay the tax. However, suppose that the demand for cigarettes is highly inelastic. Who will bear the tax burden of this tax? Explain. 

  -       If demand is highly inelastic, consumers would bear the majority of the tax burden. Producers might be able to pass on the tax to consumers without a significant decrease in quantity demanded.
• 60. One of the rules of tax incidence is that the side of the market on which the tax is imposed is irrelevant for the economic incidence (if prices can move freely). Why is that so? 

  -       If prices can move freely, the economic incidence of a tax is independent of whether it is imposed on buyers or sellers. The market forces adjust prices to distribute the burden according to the relative elasticities of supply and demand.