195 Ch3

Question 1

Good Public Policy Requires…

Answer 1

• Understanding why individuals and orgs/firms behave the way they do
• anticipating affected party’s reactions

Question 2

Models

Answer 2

• Simplified illustrations of how systems operate

- Note most are over simplified

Question 3

Law of Supply and Demand

Answer 3

• Basic model of microeconomics
• Price goes Down, demand goes up
• Price goes up, supply goes up
• Intersect at the point where supply is equal to quantity demanded - determines at what price goods are sold

Question 4

Ceteris Paribus

Answer 4

• “All other things equal”

- Used when analyzing models

Question 5

Causal Link

Answer 5

• enables policy makers to formulate policies to achieve predictable/desirable outcomes
• Challenge in social science research to identify the causal link between single variable and an outcome of interest

Question 6

Maximizing Utility

Answer 6

• Individuals goal to make them selves as well off as possible
• why they do what they do
• (Tho not all activities that give utility are pleasurable- some are to avoid disutility or maximizing long-run utility)

Question 7

Opportunity Cost

Answer 7

Notion that true cost of an activity is what we must give up in order to do it

Question 8

Firm

Answer 8

• Organizes their resources and make other decisions in order to maximize profits for owners
• Do have some nonmonetary incentives

Question 9

Human Capital

Answer 9

Notion that individuals make decisions about investments in their own skills/education in the same way a firm might evaluate such.

Question 10

Sin Tax

Answer 10

Tax with the purpose of discouraging a behavior

Question 11

Incentives

Answer 11

1) Motivate/Explain a range of Human behaviors
2) Most powerful tools for changing behaviors
3) Rational individuals/firms will avoid outcomes that make them worse off
4) Policies that fail to anticipate how rational individuals/firms respond will have unintended consequences

Question 12

Taxes Impact

Answer 12

Discourage whatever behavior thats taxed

Question 13

Subsidies Impact

Answer 13

Make some activity more attractive

Question 14

Perverse Incentives

Answer 14

-Incentives that cause rational individuals and firms to behave in ways that are not consistent with the policy and may cause serious harm

Question 15

Law of Unintended consequences

Answer 15

when one policy seeks to fix one problem and inadvertently creates another

Question 16

If a policy makes an individual worse off…

Answer 16

they will spend significant resources to evade it, legally or illegally (depending on severity)

Question 17

3 Basic Questions that should be asked about Policy Change

Answer 17

Who is affected?
How are they affected?
What is their likely response?

Question 18

Moral Hazards

Answer 18

When individuals/firms are protected against some form of loss and act with less caution than they would have otherwise as a result, thereby making a bad outcome more likely.

Question 19

Theory of offsetting behavior

Answer 19

Devices that protect us from harm might also cause us to take greater risk.
-produced by Evil Corp University (Uni of Chicago)

Question 20

Asymmetry of Information

Answer 20

• When one party to a transaction has more information than the other
• If info gap is large enough, can hinder the way markets operate or cause them to fail entirely.

Question 21

Principle - Agent Problems

Answer 21

Principle = party trying to influence
Agent - party principle is trying to influence (but has different motivations than P)
Problem= when the P expects A to act in way that’s consistent with P’s goals/objectives, but doesn’t have expertise/resources to monitor agent’s behavior

Question 22

Adverse Selection

Answer 22

• When individuals use private information to sourt themselves into or out of a market transaction
• Asymmetry of info is at core of problem

Question 23

Branding

Answer 23

When firms make large investments over time to build an identity for their products
-such as quality/durability/safty - nonobservable traits

Question 24

Signalling

Answer 24

process by which individuals or firms undertake activities with no direct value, instead these activities signal intangible information to other parties.

Question 25

Certification

Answer 25

Process whereby an independent third party attests to the quality of a good or service

Question 26

Screening

Answer 26

mechanism whereby one party to a transaction designs a mechanism that elicits privte information from another party to the transaction.