2.a. Give two examples of externalities connected with consumption and saving th
ID: 1195417 • Letter: 2
Question
2.a. Give two examples of externalities connected with consumption and saving that can be used in arguing for policies aimed at increasing U.S. personal saving. Explain why they can be used that way.
b. Explain what a traditional I.R.A. is. Explain how it increases a depositor's return to saving.
c. Explain a method that economists have used to estimate the fraction of deposits into traditional I.R.A.s that represent "new" savings induced by the favorable tax treatment the deposits receive. What theoretical reasons suggest that we could reasonably expect that less than half of these I.R.A. deposits are new saving, induced by the tax treatment? Explain
Explanation / Answer
Answer2: a. The government can promote positive externalities by paying subsidies to either buyers or producers, which is a type of market-based policy. Subsidies to buyers would lower the cost of the product, which would increase demand. Subsidies to producers would lower their cost of production, thereby increasing supply. The government may also decide that the cost of an externality is great enough to make it a public good, where the government pays outright for its production, such as vaccinations against contagious diseases, like smallpox or polio.
Most government subsidies consists of tax breaks for either the buyers or the suppliers. Education, for instance, has many positive externalities, and the government subsidizes it by giving tax breaks for people who save for college. Because technology has large spillover benefits, the government sometimes forms an industrial policy that promotes specific technologies that would have the greatest benefit to society. However, industrial policies are often criticized because they require that the government pick winners and losers and, as often happens in governments where the legislators are more interested in money than in the well-being of their country, well-financed lobbyists often control how the money is allocated.
b. Traditional IRA is an Individual Retirement Account to which you contribute pre-tax or after-tax dollars, and which allows your money to grow tax-deferred. When you make withdrawals after age 59½, they're treated as current income.Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal income tax.
It increases return on depositor's savings in floowing ways:
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