Weeks 1-3 Flashcards
Public Policy
Rules, Regulations, practices, customs and institutions that govern our social coexistence. (everything outside of private space)
Policy Analysis
The analytical process by which we seek to determine:
1) the outcomes of alternative policies (effects on unemployment because of the new 14.75 minimum wage)
2) which of various alternative policies will yield the best outcome for society (maximize social welfare)
Who does Policy Analysis?
Government (federal, state, local, executive, legislative)
Nonprofits (consulting firms, think tanks, advocacy orgnizations)
Policy advisors and analysts (planners, program evaluators, research analysts)
Academic policy research (these are longer term and provide a foundation)
Good policy analysis identifies:
Need for a program, market failure addressed by the program, alternatives to the program, particular design features of the program, private sector responses, efficiency consequences.
Underlying reasons for public policy
- market failure
- government failure
- inequality and other social values -> (protection of vulnerable populations)
Government failure
Needs address problems inherent in collective action, problems inherent in: – direct democracy – representative government – bureaucratic supply – decentralization
First types of market failure
- monopoly or: small number sellers in the market
Second type of market failure
- Public goods: goods that are non-excludable, nonrivalrous and or noncongestible.
* Example - National defense, light poles, parks
* private markets don’t create these types of goods
Rival goods
If one person uses something another person can’t.
Example - Cup of coffee
Third type of market failure
- Externalities: third party effects; costs or benefits of an action/transaction are not privately absorbed
* Example - global warming
Fourth type of market failure
- Information Asymmetries: Transaction when you have bad information about the situation
Five types of policies:
- influencing private production
- tax and subsidies to alter incentives
- rules and regulations
- freeing, facilitating and simulation markets (ex: removing regulations) - Providing insurance and safety nets
- house and car insurance
- social security is an insurance - Public production
- the government actually produces something
- national defense
- k-12 education
Economics
The study of how society responds to incentives and makes choices determining the use of finite resources and the distribution of economic outputs (goods and services)
economics in regards to scarcity or resources
Economic outputs will always be scarce and choices must be made to use resources efficiently
Choices involve trade offs
Choosing one particular option implies forgoing another option. Every choice has a cost (opportunity costs)
Caters Paribus
Holding everything else constant
Marginal
The last unit of change in something.
Utility
Measure of well being
Opportunity Cost
The cost of doing something, measured as the value of the foregone alternative
Economies of Scale
The conditions under which the cost per unit declines as the scale of production increases
Axioms
- Utility maximizing individuals
- Law of diminishing utility
- Law of diminishing marginal returns in production
Demand Curve
Graphical representation of the relationship between price and quantity demanded.
Moving along the demand curve..
results in change in quantity demanded
On the demand curve, assuming that all benefits are privately absorbed so that..
Private Marginal Private Benefit (PMB) is the same as the Social Marginal Benefit (SMB)
The market Demand
Is made up of many individuals and each individuals is assumed to have demand relative to total market.
In Market Demand is the individual the price take or price maker?
Price taker
How do you derive market demand?
Add up quantity demanded by each individual at each possible place.
What is the market demand curve?
It’s a horizontal summation of individual demand curves of all consumers in that market.
What shifts the demand relationship?
Changes in non-price factors
What are changes in non-price factors? (Increase)
An increase in demand shifts the demand curve right.
* at every price, individual is now willing and able to purchase a larger quantity of a good
What are changes in non-price factors? (Decrease)
A decrease in the demand shifts the demand curve left.
* at every price, individual is now willing and able to purchase a smaller quantity.
Change in quantity demanded =
moving along a demand curve
Change in demand =
shift to new demand curve
Decrease in demand
Means a leftward shift of the demand curve: at any given price, consumers demand a smaller quantity than before.
Increase in demand
Means rightward shift of the demand curve: at any given price, consumers demand a larger quantity than before.
Factors that will increase of decrease demand?
Income, prices of related goods, preferences, policy environment, information, expectations.
Supply Curve
For a given, quantity a business is willing and able to sell
Supply curve slope up:
Rising prices implies increase in quantity supplied.
Moving along the supply curve…
Results in change in quantity supplied
What does the supply curve represent?
Private Marginal Costs (PMC) of producing on additional unit
The supply market is made up of?
Many businesses offering the same product of sale
Businesses in the market supply are assumed to have what?
A small supply, relative to the total market
To derive the market supply…
Add up quantity supplied by each business at each possible price
Graphically what does a supply market represent?
Horizontal summation of individual supply curves
Increase in supply
This means rightward shift of the supply curve: at any given price, there is a increase in the quantity supplied
Decrease in supply
The means a leftward shift of the supply curve: at any given price there is a decrease in the quantity supplied.
Factors that will increase of decrease supply?
Prices of input needed to produce, improvements in technology increase supply, credit availability, expectations of future input price changes, Natural or policy environment
Policy environment?
Government regulations, hurricanes, drought, etc.
Market Equilibrium
Occurs at the intersection of market supply and market demand when quantity demanded = quantity supplied
The price and quantity that can’t clear the market is
equilibrium price and equilibrium quantity
Assumptions about Market Equilibrium
- All individuals and all business are price takers
* Products sold by individual businesses are homogeneous (perfect substitutes), no brand loyalty
Price Elasticity of Demand
Percent change in quantity demanded resulting from a one percent change in the price, as we move along the demand curve (disregarding the negative sign)
Why government controls prices?
When society finds equilibrium market price unacceptable (to either buyers or sellers)
Price controls
government i posed legal restrictions market price
Price ceiling
Maximum price sellers are allowed to charge
*Is binding if Pc
Price floor
Minimum price buyers are required to pay
*is binding if Pf > Pe
Example of Price Ceiling
Rent control in large cities
Deadweight Loss
Associated with quantity. A price ceiling reduces the quantity supplied below the market equilibrium quantity, leading to a deadweight loss.
Price Floors
Lower limit on allowable market price
examples of price floors
U.S Minimum wage are legal floor on hourly wage
Effects of Price ceiling
- political redistribution
- wasted resources
- low quality
- black markets
Quota (quantity control)
Upper limit on quantity that can be bought or sold.
the total amount that can be legally transacted is the quota limit
Inelastic
Non-responsive to price, low price elasticity
Elastic
Responsive to price, price elasticity > 1
* there is a flat demand curve
Natural resource depletion
Related conservation and preservation issues, pollution abatement and clean-up, inequalities in exposure to pollution.
* rival and non-excludable
Externalities
Costs and benefits of an actor or transaction that accuse to someone other than the parties involved in the action/transaction
