Homework Week 7: Government Intervention in Education and Health This homework follows on from . We saw in the first part of the course that under some assumptions, the free
market deliers efficient outcomes. Our discussion of externalities, public goods and common resources suggested
that government intervention may be required in many areas of the economy. In practice, the government is heavily
involved in education and health. This homework is designed to explore why the govenment intevenes in these
sectors. This can help us to provide clearer answers to questions relating to how the government should intervene,
and to questions that touch on both the why and the how, like “should college be free to students?”
To answer these questions, you will need to read sections 10.1 and 10.2 of the paper by Poterba (posted to the
course website). This is an excellent paper, so I would encourage you to read all of it, but for this problem set we
will focus on the first part.
1. Accordingt o Poterba, what is the difference between intervening in a market and direct providing services in
that market? To illustrate your answer, use one examples from health and one from education. [3 points]
2. How does Poterba define the “choice of instrument” problem? [1 point]
3. Describe three “efficiency” reasons that Poterba gives for government intervention in the education sector. [4
points]
4. When Poterba wrote this paper, behavioral economics had yet to develop as a field. List two insights from
behavioral economics that might justify government intervention [2 points].
5. Poterba claims that “Quantitative evidence on the substantive consequences of adverse selection remains
elusive” (p.283). Why does he claim that adverse selection be a prolem in theory but not in practice? [Hint:
in effect, this question is asking “What might private insurers do to ensure that sick people are not enrolled
in their insurance plans?”] [2 points]
6. Even if the free market led to the efficient quantity of education and healthcare being produced, we might
worry that the market outcome would not be equitable. One solution is to redistribute cash. State two
reasons that Poterba gives for why we might prefer to subsidize the education or health care of disadvantaged
populations rather than redistributing cash? [3 points] 1

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