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Prof. Jared P. Boyd BEC 152 23 November 2019

Microeconomics Research Paper: Price Theory and Market Failure

Part I: Price Theory: Comparison Wage in Actuarial Science or in the Statistics Field In microeconomics, the price theory makes reference to the fact that the price for any good or service is fixed by the law of the supply and demand. In this research paper, it will be analyzed how the wage (price for work) is determined in two different occupations: actuarial science and statistics. Actuaries analyze the management of risk and the cost of uncertainty. They must have a strong background in mathematics, statistics and in financial theory to calculate the probability of an event, by taking into account different scenarios. They also help the company in the decision process in order to minimize the risk. Most of actuaries work at insurance companies, where they help the company decide what premiums should be charged for each policy. According to the Bureau of Labour Statistics, the 2018 median pay for Actuaries is $102,880 per year[ CITATION Bur191 \l 1033 ]. According to the Bureau of Labor Statistics: Employment of actuaries is projected to grow 20 percent from 2018 to 2028, much faster than the average for all occupations. However, because it is a small occupation, the fast growth will result in only about 5,000 new jobs over the 10-year period. Actuaries will be needed to develop, price, and evaluate a variety of insurance products and calculate the costs of new, emerging risks.

Table data 2 On the other hand, a similar occupation to actuaries is becoming a statistician. Statisticians analyze data and apply statistical techniques to help solve problems or they intervene in the decision-making process. According to the Occupational Handbook of the Bureau of Labor Statistics, the median annual wage for mathematicians and statisticians was $101,900 in 2018. In private industry, mathematicians typically need an advanced degree, either a master’s degree or a doctorate. On the other side, to become an actuary, the minimum requirement is to have a bachelor degree. The median salary is higher for actuary than for a statistician but the education requirements are higher for a statistician than for an actuary. The reason for such differences is that being an actuary is a life time educational profession. An actuary is working a full-time job and in his free time has to prepare for the Society Of Actuaries (SOA) examinations. It typically takes 4 to 7 years for an actuary to earn the associate-level certification of the SOA. This happens because each exam requires hundreds of hours of study and months of preparation. After becoming associates of the SOA, actuaries typically take 2 to 3 more years to earn fellowship status. According to Will Kenton, in an article for Investopedia, the future of the labor market depends on the advancements on technology and other improvements in efficiency, but also: Other factors influencing contemporary labor markets, and the U.S. labor market in particular, include: the threat of automation as computer programs gain the ability to do more complex tasks; the effects of globalization as enhanced communication and better transport links allow work to be moved across borders; the price, quality and availability of education; and a whole array of policies such as the minimum wage. [ CITATION Ken19 \l 1033 ] The market for insurance companies and for statisticians is expected to grow, due to the economic development and the risk adversity of people in average. This means that people are not willing to risk their economic status, and therefore their need to insure everything: life, house, cars, business, health, etc. Part II: Market Failure: Do the USA have a market failure in the field of Education? In microeconomics, the price theory makes sure that the allocation of resources is well distributed. If there is a good or a service that a person values more highly than it would cost to produce it, then somebody will decide to produce it, a market exchange will take place, and both parties will be better off. An externality, as defined in Tyler Cowen’s CEE essay, “Public Goods and Externalities,” occurs when “one person’s actions affect another person’s well-being and the relevant costs and benefits are not reflected in market prices.” [CITATION Cow19 \l 1033 ] . Therefore, a market failure will determine that the private benefit from an economic transaction will be different from the social benefit. However, the only fact that private benefit is different from social benefit does not justify government intervention in the educational system. As Tyler Cowen wrote, “The imperfections of market solutions to public goods problems must be weighed against the imperfections of government solutions. Governments rely on bureaucracy and have weak incentives to serve consumers. Therefore, they produce inefficiently.”[ CITATION Cow19 \l 1033 ] Having a public education does not corresponds to the price theory, and therefore there are unintended consequences of the government intervention in the educational system. As an example, there are students who qualify for federal aid, but they do not value education more

Table data 3 than leisure, and in consequence they have a weak performance in their studies. Because education costs them nothing, they do not have an incentive to perform well in school. On the other side, there are students who do not qualify for federal aid, and they have to pay out-ofpocket for their classes. In consequence, they do value education more than leisure time, because they have paid the price for education and expect to get the benefit of educating themselves. Adam Smith laid out his arguments regarding education in Chapter I of Book V of An Inquiry into the Nature and Causes of the Wealth of Nations[ CITATION Ada04 \l 1033 ]. In his view, education of the masses was a means of improving the overall judgment of a society. Essentially, basic education will make better citizens. Smith believed that when teachers are paid a fixed salary by the schools in which they work, rather than being paid fees by each student they teach, they have no incentive toward diligence in their duties. Teachers, then, who do not directly respond to those they teach for their pay, have no reason to take an active interest in their duties. Regarding the state funding of education, then, unless we have a specific plan for public education, there cannot be reached a conclusion about whether the government intervention is efficient. We can observe that a minimum necessary condition for state funding of education in general is economically justifiable if the social net benefit provided by education is not captured by calculations of private net benefit.[ CITATION Ros02 \l 1033 ] In conclusion, the market for education is not an efficient market. On one side, it is true that the social benefit from providing education is higher than the private benefit. But on the other side, the public funding of education is inefficient, and has the unintended consequences mentioned before: the education is provided to students who do not value education above their leisure time and public schools apply discrimination price policy for out-of-state students, policy that is not consistent with the efficiency in the market of education.

Works Cited Bureau of Labor Statistics. Actuaries Occupational Handbook. 4 September 2019. Cowen, Tyler. Public Goods. 23 November 2019. The Library of Economics and Liberty. 23 November 2019. . Kenton, Will. Labor Market. 25 June 2019. 23 November 2019. . Rose, Morgan. An Education in Market Failure. 11 March 2002. 23 November 2019. .

Table data 4 Smith, Adam. Inquiry into the Nature and Causes of the Wealth of Nations. London: Methuen & Co., Ltd., 1904. The Library of Economics and Liberty....