MF&R Cheat Sheet (DRAFT) by rob

Market Failure:

When the allocation of goods and services by a free market is not efficient. Market outcomes that are pursued out of pure self-i­nterest lead to societal problems

Negative extern­ality:

An “external cost” of a product that is not incorp­orated into the product’s cost. Air pollution from a factory might be an example. Taxation is a way of fixing a negative extern­ality.

Moral hazard:

A situation where the party taking the risk won’t feel the conseq­uences of failure. Subprime loans are a good example.

Insuff­icient compet­iti­on/­market power:

The existence of monopoly power is often thought to create the potential for market failure and a need for interv­ention to correct for some of the welfare conseq­uences of monopoly power.

Public goods problem:

A public good is one where the use of it by one person does not diminish the ability of another person to benefit from it (techn­ically called “nondi­min­ish­able” or “nonri­val”), and where it would be difficult to keep any indivi­duals from enjoying its benefit (“none­xcl­uda­ble”).

Transa­ction cost:

transa­ction costs are the costs of arranging economic activi­ties.

From a policy perspe­ctive, what is wrong with a positive extern­ality? Illustrate with an example.

The costs or benefits of an extern­ality (in the case of a positive extern­ality, the benefits) are not intern­alized by the transa­cting parties. If party X cannot intern­alize or receive the full benefits of a transa­ction, X will be less likely to engage in the transa­ction in the first place, i.e., they will produce less of the the transa­ction or its benefits. So underp­rod­uction is the main theore­tical problem. (ie google)

What are the main practical diffic­ulties with policies to intern­alize extern­ali­ties?

(FAIL) Some govern­ments can fail in specific roles, and other govern­ments may simply be failed states. (UNINT­ENDED CONSEQ­UENCES) The interv­entions of a government body may uninte­nti­onally do more harm than good. (MARKET ORDER) Without the discipline of markets to determine when value is created, government activity can be both costly and ineffe­ctive. (LEGAL PROCESS) Law and regulation are the product of highly imperfect legisl­ative, admini­str­ative, and judicial processes. (ADAPT­ABI­LITY) They tend to lag behind techno­logical and social innova­tions. This time delay is partic­ularly damaging in an era of rapid change. (BUSINESS EXPERIENCE / INFLUENCE) Lawmakers, bureau­crats, and judges may lack the relevant business experience to find cost-e­ffe­ctive solutions. Or they may be unduly influenced by the lobbying efforts of business groups or other special interests. (UNCER­TAINTY) The effects of government interv­ention are often highly uncertain and occasi­onally counte­rpr­odu­ctive. (ENFOR­CEMENT) Furthe­rmore, markets have become more global, while laws tend to stop (with only a few except­ions) at national borders. This creates coordi­nation and enforc­ement problems.

general categories where govern­ments intervene on moral/­social grounds

Dees: 1) morally object­ionable exchanges 2) socially important goods 3) procedural fairness 4) distri­butive justice Bardach: 1) hard to collect payment from all the potential benefi­ciaries 2) hard to collect from the benefi­ciaries of consum­ption the true econ cost of making use of the good or service 3) When hard for consumers (and sometimes suppliers) to know the true qualities of the good or service they are acquiring 4) When the cost of producing the marginal unit lower than the average cost within the relevant range of demand

When talking about criteria for analyzing policy options, Bardach says it’s helpful to distin­guish between “analy­tical” criteria and “evalu­ative” criteria. What does he mean by “analy­tical” and “evalu­ative” criteria? Illustrate your defini­tions with examples.

The policy story has 2 interc­onn­ected but separable plotlines, the analytic and the evalua­tive. Evalua­tive: is aimed at the projected outcomes. Altern­ative A will very probably lead to Outcome OA, which we judge to be the best of the possible outcomes; therefore, we judge Altern­ative A to be the best. The Analytic plotline says whether or not they are likely to happen.

Identify and describe the three main approaches policy analysts use to resolve evaluative criteria when those criteria conflict?

1) The political process takes care of it - Allow existing govern­mental and political processes to determine the weighting in accord in with the analyst’s employer or client, and relevant arenas who are important to the employer or client. 2) An analyst imposes a solution - Underr­epr­ese­nta­tion: modify - not replacing- the weighting assigned by the employer or client by reference to some overar­ching philos­ophical or political concep­tion. The justif­ication is that certain interests, and perhaps philos­ophies, are typically “under­rep­res­ented” in government and politics. Giving the permission of the theore­tically knowle­dgeable analyst, in the name of fairness and democracy, the right the balance. (examples: taxpayers whose interests may be squeezed out by better­-or­ganized advocacy groups , future genera­tions, children, people who live outside the jurisd­iction making the decisions, ethnic and racial minori­ties, women, the poor, consumers, and animals and ecological entities). Educat­ional process : proposed to rethink existing criteria in the light of facts or arguments the analyst can draw to their attention. In this case, the analyst takes respon­sib­ility for opening up a dialogue, and perhaps for trying to infuse it with reason and insight, but then allows the political process to take over. 3) The distri­bution of “rights” precludes some solutions and forwards others.- Generally, claims based on rights are a reasonable guide to choosing “better” policies, and rights­-based criteria deserve some extra weighting. Exceptions include rights specially protected claims of an individual or a group against encroa­chment by “others,” including society as a whole, rights more emergent than establ­ished: obviously legitimate to us being merely the (so-far) best establ­ished and (probably) most socially benefi­cial. For example, “the right to privacy” or “the right to control your own body,” should evolve to fit new social and techno­logical condit­ions. Techno­logical change raises questions of privacy and transp­arency (e.g., confid­ent­iality and fairness), and the past structure of rights is not necess­arily a good guide to how to redesign that structure for the emergent situation. Decent health care, privacy, abortion, and a host of other matters that now or in the recent past have been subject to debate over who ought to have what sort of highly protected positions that we dignify and crysta­llize as rights. Overall, claims weight criteria by reference to which rights ought or ought not to take priority deserve to be treated critic­ally.

What is Public Choice Theory?

Public Choice is often referred to as a school of economics. In fact, it is more an approach to political science. It does not try to explain how the economy works. Rather, it uses the methods and tools of economics to explore how politics and government works. It analyzes how efficient, effective, and legitimate the political process is.

When there is a negative extern­ality, what would Pigou say are the three basic policy solutions available to policy makers?

Pigou’s policy approach to negative extern­ali­ties: 1) make the party pay for the damages, 2) tax extern­ality, 3) restrict extern­ality

14.Is income inequality a “market failure”? Why or why not?

The prevalence of income inequality in free market economies indicates that inequality may be the result of a market failure. Why or why not? • In a “free” market, it is believed, all indivi­duals possess an equal opport­unity to succeed, but due to a mis-al­loc­ation of resources in a purely market economy, this may not always be the case. • Whenever a market failure exists, it can be argued that there is a role for government in regulating the market to achieve a more optimal distri­bution of resources. When it comes to income inequa­lity, government interv­ention typically comes in the form of a tax system that places a larger burden on the rich, and a system of government programs that transfer income from the rich to poor, including welfare benefits, unempl­oyment benefits, healthcare for low income househ­olds, public schools and support for economic develo­pment in poor commun­ities. • Goodwin: • “Value” in economic terms is synonymous with price. The social prefer­ences that are visible to standard economic analysis are what economic actors in a society are able and willing to pay for. Demand is ultimately dependent on consumer demand; that is, firms may demand parts and other inputs from suppliers, and raw materials from primary indust­ries, but they only do so on the expect­ation that the final products will be bought by consumers. The only consumer demands for goods and services that are visible to the standard economic model are those that are backed up by a consumer’s ability to pay. This has several implic­ations. • There is nothing in the model that assures that resources are distri­buted in such a way that people can meet their basic human needs. • poverty vs education correl­ation • points to federal tax issues upon the rich. • If we look at counties where income inequality has grown the most, we see the largest income inequa­lit­y-g­rowth counties are where the divorce rates have risen most rapidl­y--­that's where the factors that marriage counselors always cite, couples they see, financial trouble. The bigger the income inequality growth, the bigger the divorce rates, the bankruptcy filings, long commute times-­-that's another margin families use when they can't make ends meet. Whole cavalcade of costs experi­enced by the guy in the middle. So: where is the data? It's there that you see the data on the shadow of income inequa­lity.

16. In what ways is policy and government action important for social entrep­ren­eur­ship?

Government support to social entrep­ren­eurship social work because most often the work produces positive extern­alities not captured in our economic system. Think feeding the homeless. The gov is needed to support these types of programs because they don't make money, but produce a huge positive extern­ality.

Define the term listed below, and provide an example of how they might prevent policy for sustai­nab­ility outcomes:

a. Logrolling (Butler, p. 66F73) An agreement to exchange votes between two groups of political interest parties: • on separate legisl­ative measures is called explicit logrol­ling. • where the different groups bundle their various proposals into a package before they are voted on - implicit logrolling b. Rent Seeking (Butler, p. 75F80) Artifi­cially created monopolies that grant a certain interest group the right to collect profits above compet­itive rates (regul­ation of the number of Taxi licenses in NYC). The interest group that is benefiting from these barriers to compet­itive entry is incent­ivized to protect them (lobby­ing…) c. Bureau­cratic budget maximi­zation (Butler, p. 89F90) simple proxy for all the other things that go with a large and growing budget – such as job security, promotion prospects, salary increases… → bureau­crats are able to maximize their own benefit within whichever budget is establ­ished by the political power; with large budgets they simply take on new functions and demand more money, with small budgets they limit their output and ensure that money sticks with them rather than being spent on projects. Bureau­crats have no personal interest in saving money, and every incentive to invent new work-s­treams and social programs → large bargaining power of bureau­cratic infras­tru­cture d. Rational ignorance (Butler, p. 52F53) In politics there is a signif­icant uncert­ainty about costs and benefits, and the minuscule chance that individual person’s vote will have a real and predic­table effect on the election→ some electors think that it is simply not worth their time and effort to become well informed on the candidates or their policies.