intro governance

8/3/2019 Intro Governance

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Policy Economics

TheoreticalEconomics

Theories

Facts


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When they are trying to explain theworld, they arescientists.

When they are trying to change the

world, they arepolicymakers.


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Positive statementsare statements

that describe the world as it is.

Called descriptive analysis

Normative statementsare

statements about how the worldshould be.

Called prescriptive analysis


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an approach to economics that seeks tounderstand behavior and the operation ofsystems without making judgments. It describes

what exists and how it works Concerned with what is

Can be supported or reported by comparison withavailable facts and figures

Factual, objective and is used to describe theoccurrence of a phenomen

Usually quantified


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An approach of economics that attempts to determinedesirability (or undesirability) of different economicconditions, programs or situations by asking what oughtto be

More subjective and more judgmental than positiveeconomics; normative statements are far more difficult toquantify

Concerned with how the basic economic functions shouldbe performed

Involves judgments and prescriptions for courses of action Prescribes remedies in the form of government policy to

correct results of market interaction when these resultsare not in accord with underlying criteria


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?An increase in the minimumwage will cause a decrease inemployment among the least-

skilled.


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Higher budget deficits willcause interest rates to

increase.


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The income gains from a higher

minimum wage are worth morethan any slight reductions in

employment.


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??State governments should beallowed to collect from tobaccocompanies the costs of treating

smoking-related illnesses among the

poor.


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Normative statement cannot be rejected byfacts; it embodies a prescription rather than a

prediction

While positive economics is independent ofnormative economics, the latter is basedboth on the former and the value judgmentsof society.


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Controversies in positive economics can be (andare) usually resolved by the collection of more orbetter market data.

e.g. minimum wage

Controversies in normative economics usuallyare not and cannot be resolved. Economists canprovide an analysis of the economic costs andbenefits but is not likely to lead to generalagreement on the proposition

e.g. national defense budget having a biggerbudget than education


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They may disagree on theories

about how the world works.They may hold different values

and, thus, different normative

views.


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A ceiling on rents reduces the

quantity and quality of housingavailable.

Tariffs and import quotas usually

reduce general economic welfare.


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Conservative maxim give according topersonal contribution or resources

Liberal Maxim

give according to resource Radical maxim according to sacrifice or

personal effort Humane Maxim give according to need Procedural Maxim


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Utilitarian - that action is right which, in relationto all other alternative actions, will result inmaximising the probable happiness or well-being of humanity as a whole, or more

Distributional maxim - there are sectors in the

society that needs more attention/ special care

Pareto Optimality/Pareto Efficiency


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benefit equally; nobody should be disadvantaged

A situation where no one in the economy can bemade better off without someone else (at leastone person) being made worse off


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Italian economist, who in 1909devised the efficiency rule and

became the cornerstone ofwelfare economics 80-20 Principle


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studies the conditions for economic efficiency inthe production of output and in the exchange ofcommodities, and equity in the distribution of

income; should be distinguished from theeveryday usage of welfare (mostly to governmentprograms to aid low-income families)


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occurs when there is a change in theallocation of resources which makes one

person better off but doesn

t make anybodyelse worse off e.g. If three people have 10 apples and one

person gets one more apple, it will be aPareto improvement so long as the extraapple did not come at the expense of one of

the other three individuals apples

f


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An allocation is Pareto-efficient for a givenset of consumer tastes, resources and

technology, if it is impossible to move toanother allocation which would makesome people better off and nobody worse

off.


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Pareto efficiency is not related to equity. If one individual had a million apples and

everybody else only had one apple then itwould still be Pareto efficient so long as thereis no way for the individual to get a millionand one apples without it making everyone

else poorer. If he could get a million and oneapples without it making other people lesswell off then it could be described as Paretoefficient.


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A distortion exists whenever societys marginal cost

of producing a good does not equal societys

marginal benefit from consuming that good. Some such distortions may be inevitable

and it may be more efficient to spread such distortion over

a wide range of markets, rather than concentrating it in

one market

this results from the theory of the second-best


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Market power

Game Theory first movers, Nash Equilibrium

Imperfect competition: Oligopoly, Monopoly

Externalities

Activities (production or consumption ) wherethere are distortions that result from spillovereffects that are not properly priced


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Imperfect information about the safety ofcharacteristics of goods or jobs

Market failures associated with privateundervaluation o f the risks associated withparticular activities or products and theirconsequent overproduction

E.g. exposure to dangerous benzene vapors ingasoline refining plants


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Social priorities other than efficiency ofproduction

Occurs where society prefers an outcome otherthan that of the free market not for reasons ofefficiency , but because of social targets

E.g. equality, literacy, or peace


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Environmental problems are modeled as

market failures using either the theory ofpublic goods or the theory of externalities


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Utility satisfaction Transparency

Equity Fairness Justice distribute goods justly Efficiency


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Externalities are costs or benefits of markettransactions not reflected in prices

These costs or benefits are external to themarket prices of goods whose production orconsumption generates them

Externalities represent effects on third partiesnot participating in the market exchangesthat are not reflected in the market values oftraded goods

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