195 Ch3 Flashcards
Good Public Policy Requires…
- Understanding why individuals and orgs/firms behave the way they do
- anticipating affected party’s reactions
Models
- Simplified illustrations of how systems operate
- Note most are over simplified
Law of Supply and Demand
- 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
Ceteris Paribus
- “All other things equal”
- Used when analyzing models
Causal Link
- 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
Maximizing Utility
- 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)
Opportunity Cost
Notion that true cost of an activity is what we must give up in order to do it
Firm
- Organizes their resources and make other decisions in order to maximize profits for owners
- Do have some nonmonetary incentives
Human Capital
Notion that individuals make decisions about investments in their own skills/education in the same way a firm might evaluate such.
Sin Tax
Tax with the purpose of discouraging a behavior
Incentives
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
Taxes Impact
Discourage whatever behavior thats taxed
Subsidies Impact
Make some activity more attractive
Perverse Incentives
-Incentives that cause rational individuals and firms to behave in ways that are not consistent with the policy and may cause serious harm
Law of Unintended consequences
when one policy seeks to fix one problem and inadvertently creates another
If a policy makes an individual worse off…
they will spend significant resources to evade it, legally or illegally (depending on severity)
3 Basic Questions that should be asked about Policy Change
Who is affected?
How are they affected?
What is their likely response?
Moral Hazards
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.
Theory of offsetting behavior
Devices that protect us from harm might also cause us to take greater risk.
-produced by Evil Corp University (Uni of Chicago)
Asymmetry of Information
- 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.
Principle - Agent Problems
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
Adverse Selection
- When individuals use private information to sourt themselves into or out of a market transaction
- Asymmetry of info is at core of problem
Branding
When firms make large investments over time to build an identity for their products
-such as quality/durability/safty - nonobservable traits
Signalling
process by which individuals or firms undertake activities with no direct value, instead these activities signal intangible information to other parties.
Certification
Process whereby an independent third party attests to the quality of a good or service
Screening
mechanism whereby one party to a transaction designs a mechanism that elicits privte information from another party to the transaction.
