PLCY210 Policy Innovation and Analysis Overview

Public Policy

Process of making collective decisions binding all affected parties

Policy Analysis

Toolset to analyze social problems and implement effective solutions

Market Concentration

High concentration increases consumer prices and lowers supplier prices

Natural Monopoly

Market where one firm is most efficient due to economies of scale

Artificial Monopoly

Market where one firm dominates due to legal or artificial barriers

Market Regulation

Restricts market freedom, hindering self-correction mechanisms

Market Failure

When markets do not allocate resources efficiently

Taxpayer Resources

Funds from citizens used for public programs like education

Policy Process Pitfalls

Common issues when identifying benefits: vague goals, unintended consequences, timing

Stakeholder Analysis

Assessing parties affected by policy changes and their responses

Perverse Incentives

Incentives leading to unintended negative outcomes

Social Welfare Measurement

Assessing well-being through poverty, utility, and social welfare functions

Absolute Poverty

Lacking basic necessities for survival

Relative Poverty

Income below a percentage of median income in a society

Utility

Theoretical concept of satisfaction or well-being

Social Welfare Index

Combines individual utilities into a societal well-being measure

Efficiency

Optimal resource use for maximum productivity

Pareto-Efficiency

Allocations where no one can be made better off without making others worse off

Deadweight Loss

Loss of economic efficiency due to market inefficiencies

Equity Types

Fairness principles: distributive, procedural, interactional

Pareto-inefficient

An allocation of resources is Pareto-inefficient when it is possible to make one or more persons better off without making anyone worse off

Equity

A measure of a policy's fairness, including horizontal equity, vertical equity, and intergenerational equity

Market Economy

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Willingness to Pay (WTP)

The maximum amount a buyer will pay for a good, indicating how much the buyer values the good

Consumer Surplus

The amount a buyer is willing to pay minus the amount the buyer actually pays for a good

Cost

The value of everything a seller must give up to produce a good, including the value of the seller's time

Producer Surplus

The amount a seller is paid for a good minus the seller's cost

Social Surplus

The sum of consumer surplus and producer surplus in a market

Incomplete Information

When one party to a transaction has more information than the other, potentially hindering market operations

Opportunity Cost

The true cost of an activity, representing what must be given up to do it in a world of scarce resources

Information Asymmetry

When one party has more information than the other in a transaction, potentially causing market failures

Competitive Market

A market with many buyers and many sellers, where no individual buyer/seller can affect the market price of the good/service

Law of Supply and Demand

States that as the market price of a good or service falls, consumers demand more of it, and when the price rises, firms supply more

Models

Simplified illustrations used by policy analysts to understand complex systems and relationships

Horizontal Equity

A measure of the degree to which similar persons and situations are treated equally

Vertical Equity

A measure of the degree to which rich and poor are treated differently in terms of benefits or taxes

Intergenerational Equity

Fairness in how policies treat different generations, considering future taxpayers and current retirees

Supply Curve

Illustrates the relationship between the price of a good and the quantity supplied by firms

Demand Curve

Illustrates the relationship between the price of a good and the quantity demanded by consumers

Information Transparency

When information is openly available, allowing for better market operations

Transaction Costs

The costs associated with making an exchange or completing a transaction

Means assigning a price-tag to every activity

Assigning a monetary value to all actions or tasks.

Market transaction

An exchange of goods or services between buyers and sellers, which can be conducted without involving money.

Market failure

Occurs when market transactions do not result in an efficient allocation of resources for society.

Property rights

Ownership or control granted and enforced by the government over assets, property, or ideas.

Transaction costs

Expenses related to participating in a market transaction, including information, legal, and negotiation costs.

Competition promotion

Government actions to ensure markets are competitive, preventing collusion and encouraging innovation and lower prices.

Negative externalities

Costs imposed on third parties due to actions of market participants, not accounted for in the transaction.

Positive externalities

Benefits generated for third parties by market participants' actions, often overlooked in private transactions.

Coase Theorem

States that parties will resolve externalities efficiently if property rights are clear, transaction costs are low, and parties can negotiate.

Pigovian tax

Tax levied on activities with negative externalities to align private costs with social costs.

Cap and trade

Regulatory approach where emission permits are traded, creating a market for pollution rights and incentivizing emission reduction.

Value

A strongly held belief rooted in faith, life experience, or ideology

Fact

An objective reality or truth, generally informed by observations, measurement, or calculation

Theory

A general principle supported by data or analytics; can be supported, proved, or disproved by subsequent inquiry

Positive analysis

A statement of fact, finding, or theory devoid of judgement

Normative analysis

An explicit judgement about what should be done

Monopoly

A firm that is the sole seller of a product without close substitutes

Market power

The ability of a firm to influence the market price of the product it sells

Barriers to entry

Factors that prevent other firms from entering the market

Marginal revenue

Additional revenue from selling one more unit at a specific price

Profit Maximization

Setting the price where marginal revenue equals marginal cost to maximize profits

Cartels

Producers agreeing to cooperate in setting prices and output levels

Elasticity

A measure of the degree to which supply or demand changes in response to a change in price

Inelastic

When the supply or demand for a product is relatively invariant to price changes

Public Goods

Goods and services that enhance social welfare but may not be provided by the market

Free-rider problems

Arise when individuals benefit from a public good without contributing

Tragedy of the commons

Overuse of shared resources leading to depletion or degradation

Moral hazard

When one party takes risks because another party will bear the costs

Paternalism

Policy restricting freedom for the benefit of individuals

Information asymmetries

When one party in a transaction has more or better information than the other

Property Rights

Theoretical and legal ownership of specific property by individuals and the ability to control it

Competition

Rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume

Rivalrous

If consumed, it cannot be consumed by another.

Excludable

Consumer has complete control over the good.

Non-rivalrous

All consumers receive marginal benefit from an additional unit of the good at zero marginal costs of consumption.

Nonexcludable

A person cannot maintain exclusive rights over the good; price does not reveal marginal benefits.

Valuation of Public Goods

Everyone consumes the same quantity of a public good.

Free-riders

People who benefit from public goods without contributing, leading to underprovision of the good.

Tragedy of the Commons

Overuse of a rival resource, such as ocean fishing, leading to diminished consumer utility.

Government provision

Direct government funding and provision of public goods.

Private Production of Public Goods

Involves determining who should produce each public good, considering incentives and quality.

Moral Hazard

Occurs when protected individuals or firms act with less caution, increasing the likelihood of a bad outcome.

Providing a Social Safety Net

Includes redistribution and paternalism to address inequitable resource allocation and prevent harmful behavior.

Redistribution

Government intervention to address resource inequalities, with potential efficiency costs but improved social welfare.