PUPPOL 201: Midterm 3

What is public policy?

what the government chooses to do or not do about issues concerning the public

Why do we try to define a policy problem as simply as possible?

helps make the problem easier to understand and solve.

What is the difference between a management problem and a policy problem?

• Policy problems are about what to do

• Management problems are about how to do it

What is the relationship between a policy problem's causes and its symptoms?

• Causes: what creates the problem

• Symptoms: visible problem

What are the implications of a decision maker targeting a policy problem's symptoms versus its causes? What is an example of this?

• Fixing SYMPTOMS may give short-term relief

• Fixing the CAUSE brings long-term solutions.

What is the relationship between a policy problem and policy options?

policy options can be utilized as tools to help solve policy problems

When we think about economic theory, what are the basic assumptions we make about individuals? What are the basic assumptions we make about firms?

• individuals...should have freedom of choice, will make choices by weighing costs and benefits, will seek to maximize utility

• firms...enter/exit the market, compete, maximize profit

What are the six basic assumptions we need to make when we analyze markets?

• all parties to a trade are assumed to have full knowledge

costs and benefits associated with the trade are reflected in the market price

• property rights are specified and enforced

• preferences are sincere: peoples preferences are unlikely to change randomly; if something were to change, it would be gradual and over time

• no buyer or seller can manipulate prices

• no coercion i.e. all parties participate freely: companies aren't trying to create a monopoly

What is the basic relationship between supply and demand relative to prices and quantities demanded?

• price increases -> quantity demand decreases

• prices decreases -> quantity demanded increases

• price increases-> quality supplied increases

price decreases -> quality supplied decreases

Shift in the demand curve

• caused by...income, preferences, related goods, expectations

• right shift: P increases, D increases; Left shift: P decreases, D decreases

Shift in the supply curve

• caused by...input costs, tech, expectations, # of sellers

• Rights shift: P decreases, S increases; Left shift: P increases, S decreases

How can we model 2 shifts at the same time? How does this effect the Equilibrium Price andQuantity?

• analyze each separately, assess net effect on P and Q

• depends on which shift is stronger

When is a price ceiling or floor binding?

• price ceiling: maximum price you can sell a product

• floor binding: minimum value at which you can sell a product

What is an externality? What are the two types of externalities? Find an example of each.

• consumption externality: if one consumer cares directly about another agent's production or consumption (ex. negative externalities: neighbor playing loud music at 3am -> affected my living; positive externalities: neighbor gardening)

• production externality: production possibilities of one firm are influenced by the choices of another firm or consume (ex. positive: apple orchard next to a beekeeper; negative: fishery cares about pollutants dumped into fishing areas -> affecting my ability to produce a good/service)

What causes a monopoly?

• caused when a single firm gains exclusive control over a market due to barriers to entry

• size of one business in the market, colluding and restricting output to raise prices, technology gaps

As it pertains to specific types of market failure, why is information asymmetry a type of marketfailure?

• sellers, with more information, may exploit buyers

• ex. used car market: sellers know more about a car's condition than buyers—causing buyers to underpay or avoid buying altogether, which drives high-quality cars out of the market

As it pertains to specific types of market failure, why are positive externalities a type of marketfailure?

• social benefits of a good or service exceed the private benefits to the individual consumer, leading to underconsumption in a free market

• ex. education: may benefit society but individuals may not utilize it to its fullest due to not enough subsidies and/or resources

As it pertains to specific types of market failure, why are negative externalities a type of marketfailure?

• social costs of a good or service exceed the private costs borne by the producer or consumer, leading to overproduction or overconsumption in a free market

• ex. pollution: harms nearby residents, but the factory doesn't pay for those health or environmental costs—resulting in more pollution than is socially optimal

What are public goods? Can you provide an example?

• Non-excludable and Non-rivalrous

• ex. national defense

What does it mean when we talk about goods being excludable or non-excludable, and rivalrous or non-rivalrous?

• excludable: can or cannot be prevented from using the good

• rivalrous: one person's use may or may not reduce availability for others

If we think about these criteria as creating four categories of goods, what are these four categories called?

• private goods: excludable + rivalrous (ex. cell phones)

• club goods: non-rivalrous + excludable (ex. online newspaper)

• common pool resources: non-excludable + rivalrous (ex. public park)

• public goods: non-excludable + non-rivalrous (ex. national defense)

Why is cost-benefit analysis used in government decision making?

evaluate whether the benefits of a policy or project outweigh its costs, ensuring efficient allocation of public resources

What are the basic assumptions on which cost-benefit analysis is based?

• a program's or policy's inputs and outputs (all is known to us)

• the behavior of those targeted by the program or policy

• the time horizon of the inputs and outputs

• the discount rate (future evaluation of the value of the dollar (what will be value of the dollar)

How is a measure of cost-effectiveness calculated? What are the benefits and drawbacks of a cost-effectiveness measure compared to a cost-benefit analysis?

• cost-effectiveness = cost/effectiveness unit

• used when benefits cannot be monetized

• no comparison across goals (can't weigh different types of benefits)

• lacks a dollar-value threshold

What does it mean to calculate the net present value of a public project?

• NVP Project = NVP benefits - NVP costs (in present dollars)

How are the net present value of benefits and the net present value of costs used to determine the netpresent value of a project?

• NPV > 0 means project is worthwhile

• NVP < 0 means project is not worth it

What is the equation to calculate net present value? What is the discount rate?

• NPV = future value/(1+r)^t

• discount rate: future evaluation of the value of the dollar (what will be value of the dollar)

How does the discount rate reflect policymakers' attitudes about the future when considering aproject's benefits?

• lower discount rate = long term

• higher discount rate = short term

What is surplus and shortage?

• surplus: when quantity supplies is greater than quantity demanded; Qs > Qd; more sellers willing to sell at this price, then people willing to pay

• shortage: when quantity demanded is greater than quantity supplied; Qd > Qs; more want to purchase than willing to sell in the market at a given price

What is a compliment and what is a substitute?

• complement: things that go together in the market but have an inverse relationship when it comes to pricing goods (ex. coffee and creamer: when the price of coffee rises, the demand for creamer typically falls because they are consumed together)

• substitute: as the price goes up, you may want another cheaper product to substitute it out (ex. butter and margarine: if the price of butter rises, consumers may buy more margarine instead, increasing its demand)

What if a market transaction generates spillover effects that are negative?

public policy can leverage a tax to increase the cost (price) of production

What if a market transaction generates spillover effects that are positive?

public policy can leverage a subsidy to decrease the cost (price) of production or/and can use information to increase consumer demand