Homework Wk 1 Economics
Week 1 Homework
2.3
The U.S government subsidizes flood insurance because those who want to buy it live in the flood plain and cannot get it at reasonable rates. What inefficiency does this create?
This creates an inefficiency because the high deductibles insurance companies have. If the coverage for flood insurance is at a reasonable rate but the deductibles are high than the inefficiency would be people have a choice to not buy the insurance. If a persons intent is to lower their deductible the rate for the flood insurance increases. For example, if the floor insurance covers up to 200,000 but the deductible is 100,000 this would not be reasonable because most people don’t have 100,000 to put towards the deductible. Also, there are those people who would rather just take their chances and not get flood insurance due to it increasing home insurance. Lastly, if a flood event does happen the cost of flood insurance will increase to a rate that current policyholders cannot afford. A few examples of this can be found after hurricane Katrina hit Louisiana. The following website has a few homeowners stories that relate to increasing rates after Katrina hit: http://www.nola.com/politics/index.ssf/2013/12/louisiana_flood_insurance_horr.html There is evidence to support the view that the government is actually encouraging citizens to live in areas most in danger of flood damage. According to a 2010 report issued by the Institute for Policy Integrity, Congress has historically set the premium rate too low for flood insurance — effectively subsidizing building in flood-prone areas at the expense of taxpayers at large. This practice has helped drive the fund $19 billion in debt, caused mostly by the unusually severe damage caused by Hurricane Katrina. (http://business.time.com/2012/10/30/should-the-federal-government-be-subsidizing-flood-insurance/)
3.1
You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value. U2 has a
2.3
The U.S government subsidizes flood insurance because those who want to buy it live in the flood plain and cannot get it at reasonable rates. What inefficiency does this create?
This creates an inefficiency because the high deductibles insurance companies have. If the coverage for flood insurance is at a reasonable rate but the deductibles are high than the inefficiency would be people have a choice to not buy the insurance. If a persons intent is to lower their deductible the rate for the flood insurance increases. For example, if the floor insurance covers up to 200,000 but the deductible is 100,000 this would not be reasonable because most people don’t have 100,000 to put towards the deductible. Also, there are those people who would rather just take their chances and not get flood insurance due to it increasing home insurance. Lastly, if a flood event does happen the cost of flood insurance will increase to a rate that current policyholders cannot afford. A few examples of this can be found after hurricane Katrina hit Louisiana. The following website has a few homeowners stories that relate to increasing rates after Katrina hit: http://www.nola.com/politics/index.ssf/2013/12/louisiana_flood_insurance_horr.html There is evidence to support the view that the government is actually encouraging citizens to live in areas most in danger of flood damage. According to a 2010 report issued by the Institute for Policy Integrity, Congress has historically set the premium rate too low for flood insurance — effectively subsidizing building in flood-prone areas at the expense of taxpayers at large. This practice has helped drive the fund $19 billion in debt, caused mostly by the unusually severe damage caused by Hurricane Katrina. (http://business.time.com/2012/10/30/should-the-federal-government-be-subsidizing-flood-insurance/)
3.1
You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value. U2 has a
References: Froeb, L. M., & McCann, B. T. (2014). Managerial economics: A problem solving approach (3rd ed). Australia: South-Western Cengage Learning. Louisiana Flood Insurance horror stories, 2013, http://www.nola.com/politics/index.ssf/2013/12/louisiana_flood_insurance_horr.htm Time Website, 2012, http://business.time.com/2012/10/30/should-the-federal-government-be-subsidizing-flood-insurance