PubPol 101 Midterm Review

What is Pareto efficiency?

An allocation of goods where no further trades can be made which benefit someone without harming someone else

What is a market failure?

When the market cannot achieve a Pareto efficient allocation on its own

What are the 4 forms of market failure?

Externalities, public goods, natural monopoly, information asymmetry

What are the two characteristics that define a public good?

Non-rivalrous (consumption doesn’t stop someone else from consuming that unit)

Non-exclusive (you can’t bar someone from using the good)

Why can public goods create a free rider problem?

There is no incentive for users to reveal true demand

What is an externality?

When a trade impacts parties that were not involved in the trade

A positive externality results in ___ consumption and ___ production

Under-consumption and underproduction

A negative externality results in ___ consumption and ___ production

Over-consumption and overproduction

In which kind of externality is total social benefit not captured?

Positive

In which kind of externality is total social cost not captured?

Negative

What is a natural monopoly?

Economies of scale allow a single firm to produce a good more cheaply than any other arrangement

What conditions make a natural monopoly likely?

High barriers to entry, inefficiency when the demand is inelastic

What is an example of a natural monopoly?

Utility companies

What is an information asymmetry?

When the amount of information about a good varies significantly between producers and consumers

Why are post experience goods especially likely to create inefficiency?

You can’t gauge quality/there isn’t much info until after the good has been purchased

How can you remedy information asymmetry?

Branding, warranties, licensing

What is an example of an information asymmetry?

Used car/lemon market

What is an example of a public good?

A lighthouse, clean air

What is an example of a negative externality?

Air pollution

What is an example of a positive externality?

Education

What is the main role of public policy when private markets fail to reach socially efficient outcomes?

Replaces individual choice with collective choice using the power of government to enforce decisions, justifying intervention when market can’t achieve Pareto efficiency

Why is the 8fold path described as iterative rather than linear?

You want to redefine the problem as you go through the process, because the problem definition is the “North Star” guiding you and informing your choices

What are the five tasks involved in defining the policy problem?

Frame, quantify, diagnose, rationalize intervention, set a goal

What are 3 useful ways to frame a policy problem?

Deficit, excess, missed opportunity for social gains

What should a good problem definition do?

Try to quantify, don’t imply a solution, be concise, avoid issue rhetoric

What are three reasons policy analysts assemble evidence?

Assess nature and extent of problem

Assess features (jargon, opinions, data)

Look at existing policies

What should you be cautious about when you collect evidence?

Be cautious about who is giving information (reputable source? advocacy material?)

Is it worth your time and energy?

What is a policy alternative?

Alternatives are any deviation in policy from the status quo

What is status quo policy?

No changes in policy, what is already in place to address objectives

What are five sources or methods for constructing alternatives?

Theory

Politics

Reform

Replication

Innovation

Strong alternatives should be… (4 things)

Actionable

Detailed

Contextual

Described, not evaluated

“Off-the-shelf” criteria: Effectiveness definition

How effectively does alternative address the problem?

“Off-the-shelf” criteria: Efficiency definition

How much money will the alternative cost taxpayers, the government, and other stakeholders?

“Off-the-shelf” criteria: Equity definition

How fairly are benefits and burdens distributed among groups?

“Off-the-shelf” criteria: Political feasibility definition

How likely can the alternative gain political support needed for implementatation?

“Off-the-shelf” criteria: Administrability definition

HOw easily can it be implemented and managed in practice?

What are the “off-the-shelf” criteria?

Efficiency, equity, effectiveness, political feasibility, administrability

If price rises, Qd generally

Decreases

If demand increases, the demand curve shifts

Right

If supply increases, the supply curve shifts

Right

Market equilibrium occurs when

Qs = Qd

A shortage occurs when Qd is (less/greater) than Qs

Qd is greater than Qs

A surplus occurs when Qd is (less/greater) than Qs

Qd is less than Qs

What is price elasticity of demand?

How much Qd changes with price change

What is price elasticity of demand useful for figuring out?

Helps determine who bears tax incidence

What is elastic demand?

When the price changes, the Qd is variable to change

Who does the tax incidence fall on in elastic demand?

Producers

What is inelastic demand?

Price changes and demand stays the same

Where does the tax incidence fall with inelastic demand?

Tax incidence on consumers

How does demand for a normal good change when income rises?

Demand increases, demand curve shift right

How does demand for an inferior good change when income rises?

Demand decreases, demand curve shift left

What is DWL?

Lost gains from trade created when the market moves away from the original equilibrium

What are the first four parts of the 8fold path?

Define problem, assemble evidence, construct alternatives, select criteria

How can you assemble/present evidence effectively?

Use analogies

What are some ways to construct alternatives?

Alternatives already proposed

Issue advocates, political actors, other stakeholders

Policies employed in analogous contexts

Designing new policy options

In constructing alternatives, what makes something actionable?

Concrete statement of how it would mitigate the problem

In constructing alternatives, what makes something detailed?

So that it is possible to project consequences

In constructing alternatives, what makes something contextual?

Constrained within purview

In constructing alternatives, what makes something described, not evaluated?

Describe the policy option, don’t make a causal claim because you don’t yet know outcomes

What is significant about selecting the criteria?

It is your chance to imbue your own opinions and values

What are some non- “off-the-shelf” criteria?

Freedom, community, economic freedom, equality before the law, equality of opportunity, free speech, privacy, safety, transparency

What is consumer surplus?

Difference between what a consumer was willing to pay vs actually paid

What is producer surplus?

The difference between what a producer was willing to charge for a good vs what was charged

What can Pareto efficiency tell you?

Whether there is any unrealized gain left in an arrangement

Whether a proposed change can make someone better off at no one’s expense

What can Pareto efficiency not tell you?

Which of many efficient allocations we want

How gains/burdens are distributed

Who was at the table when arrangements were set

What prevents market power?

• Many buyers/sellers so no one party impacts market

• Homogeneous goods

• Free entry and exit

• Costless, complete information

What is a pure public good?

Uncongested

What is the problem with a pure public good?

Private supply is unlikely because exclusion is not possible, so there will be underproduction/consumption

How does the government solve pure public goods? What is an issue with this solution?

Providing some of that good, eg. NPR

Issue of free riding

What is a toll good?

Non-rival, excludable

Letting people use it wouldn’t diminish capacity level

What is the issue with a toll good?

Under-provision and under-consumption

What is an open-access good?

Rival, non-excludable

It can be used up, but x can’t stop y from using it

What is the problem with open access goods?

Tragedy of the commons, overproduction/consumption

In a negative externality, MPC is (less/greater) than MSC

MPC < MSC

Costs not fully internalized by market

In a positive externality, MSB is (less/greater) than MPB

MSB > MPB

Benefits not fully internalized by market

Monopsony definition

One major buyer/demand side

Natural monopoly characteristics

-High fixed costs requiring upfront investment, after which producer experiences economy of scale

Economies of scale

Cost declines as output increases

Oligopoly

A few monopolistic behaving companies

What is another way, not market, to identify a problem for public policy to solve?

Shared social preference

Valence issue definition

Voters agree on ends but not means

Position issue definition

Voters disagree on means and ends

Information definition

Claims of fact, influenced by who purveys it

Data definition

Collected according to statistical protocols in regularized surveys

Evidence definition

Reliable data analyzed and interpreted such that it has relevance to the problem, and may sway how you think of it

Which is subject to the “telephone” phenomenon?

Data, evidence, information

Information

Types of evidence evaluation

Impact

Efficiency

Impact evaluation definition

What impact did this policy have on society?

Intention vs outcome

Efficiency evaluation

What’s the cost per outcome? Was it worth the inputs?

Would using inputs in another way be better?

Impact evaluation chart characteristics

Inputs

Outputs

Outcomes

Activities

What are impact evidence inputs?

Resources, actors, instances

What are impact evidence outputs vs outcomes?

Output is connected to an activity, is more literal

Outcomes are why the output is important

Correlation

Two variables move together

Causation

Independent variable causes dependent variable to change

Y changes if X changes, all else held constant

Directed acrylic graphs

Maps how things contribute to other things

Streetlight effect

Idea that people look for things where you can see them most clearly

How can you evaluate data?

Internal validity — how is the test run? How was data gathered? Is it scientific?

What are aspects of internal validity?

Selection — who enrolls in a study

Attrition — who stays in a study

Testing

What are aspects of external validity?

Generalizability — can your finds apply to the general population? Or just the lab variables?

Different settings/circumstances

Lab conditions vs real-world conditions

Classical policy analysis

Compares alternative policy instruments