ECN 441- Exam 2 Book definitions Rated A+

optimal fiscal federalism - The question of which activities should take place at which level of government. intergovernmental grants - Payments from one level of government to another. fiscal equalization - Policies by which the national government distributes grants to subnational governments in an effort to equalize differences in wealth. solves the problems of preference revelation and aggregation - Tiebout Formal Model lump-sum tax - A fixed taxation amount independent of a person's income, consumption of goods and services, or wealth. house price capitalization - Incorporation into the price of a house the costs (including local property taxes) and benefits (including local public goods) of living in the house. tax-benefit linkages - The relationship between the taxes that people pay and the government goods and services that they get in return. matching grant - A grant, the amount of which is tied to the amount of spending by the local community. block grant - A grant of some fixed amount with no mandate on how it is to be spent. school finance equalization - Laws that mandate redistribution of funds across communities in a state to ensure more equal financing of schools. (most dramatic) social insurance programs - Government interventions in the provision of insurance against adverse events. means-tested - Refers to programs in which eligibility depends on the level of one's current income or assets. Adverse Selection - the problem of incomplete information - of choosing alternatives without fully knowing the details of available options Moral Hazard - Arises when people behave recklessly because they know they will be saved if things go wrong Adverse actions taken by individuals or producers in response to insurance against adverse outcomes. insurance premiums - Money that is paid to an insurer so that an individual will be insured against adverse events. consumption smoothing - The translation of consumption from periods when consumption is high, and thus has low marginal utility, to periods when consumption is low, and thus has high marginal utility. states of the world - The set of outcomes that are possible in an uncertain future. actuarially fair premium - An insurance premium that is set equal to the insurer's expected payout. risk aversion - The extent to which individuals are willing to bear risk. information asymmetry - The difference in information that is available to sellers and to purchasers in a market. (when insured know more about their underlying level of risk than do insurers. This asymmetry can cause the failure of competitive markets) adverse selection - The fact that insured individuals know more about their risk level than does the insurer might cause those most likely to have the adverse outcome to select insurance, leading insurers to lose money if they offer insurance. risk premium - The amount that risk-averse individuals will pay for insurance above and beyond the actuarially fair price. pooling equilibrium - A market equilibrium in which all types of people buy full insurance even though it is not fairly priced to all individuals. separating equilibrium - A market equilibrium in which different types of people buy different kinds of insurance products designed to reveal their true types. still represents a market failure experience rating - Charging a price for insurance that is a function of realized outcomes. self-insurance - The private means of smoothing consumption over adverse events, such as through one's own savings, the labor supply of family members, or borrowing from friends. Social Security - A federal program that taxes workers to provide income support to the elderly.