Econ 130 - Public Policy Slides 1

Public Policy

Decisions and actions taken by a governing authority that affect at least a subset of the population.

Economists’ View of Public Policy

People are rational and self-interested; competitive markets allocate goods and services efficiently under certain conditions, but government intervention is justified when conditions fail or when efficiency isn’t the only goal.

Other Perspectives on Public Policy

Ethical, political science, and sociological perspectives that emphasize fairness, power, or social outcomes rather than purely economic efficiency.

Rationale for Government Intervention

Exists when markets fail or when other social objectives (like equity or liberty) conflict with pure efficiency.

Economists’ Consensus Example – Rent Ceiling

A ceiling on rents reduces the quantity and quality of housing available.

Economists’ Consensus Example – Tariffs

Tariffs and import quotas usually reduce general economic welfare.

Economists’ Consensus Example – Outsourcing

The U.S. should not restrict employers from outsourcing work to foreign countries.

Economists’ Consensus Example – Agricultural Subsidies

The U.S. should eliminate agricultural subsidies.

Economists’ Consensus Example – Social Security

Without policy change, the Social Security funding gap will become unsustainable within 50 years.

Economists’ Consensus Example – Minimum Wage

A minimum wage increases unemployment among young and unskilled workers.

Economists’ Consensus Example – Pollution Control

Effluent taxes and marketable pollution permits are more efficient than pollution ceilings.

Chicago Booth Economic Experts Panel

A recurring survey collecting economists’ opinions on policy topics like tariffs, vaccine mandates, AI regulation, and minimum wage.

Policy Evaluation Questions

(1) What is the rationale for government intervention? (2) Is the current policy the best way to achieve the goal? (3) Might there be unintended consequences?

Evaluating Public Policy – Key Points

(1) Good intentions are not enough. (2) Individuals and businesses creatively respond to incentives, sometimes undermining regulations.

Unintended Consequences

Outcomes that differ from policymakers’ intentions due to behavioral responses to incentives.

Positive Statement

A factual claim describing “what is” (can be tested or verified).

Normative Statement

A value-based claim describing “what ought to be.”

Three Normative Standards

Efficiency, equity (fairness), and liberty (freedom).

Efficiency vs. Equity Tradeoff

Policies promoting fairness may reduce total efficiency and vice versa.

Efficiency vs. Liberty Tradeoff

Policies increasing efficiency may reduce individual freedom.

Recurring Themes in Economic Policy

(1) Efficiency vs. equity, (2) Markets vs. governments, (3) Marginal benefits vs. marginal costs, (4) Tradeoffs (“increase x” means “decrease y”), (5) Private incentives vs. social costs/benefits, (6) Unintended consequences.

Example – CAFE Standards

Policy requiring higher fuel efficiency to reduce pollution and oil dependence; may lead to unintended results like increased driving or SUV loopholes.

Example – Import Quotas on Japanese Cars (1981)

Intended to protect U.S. car makers but led to higher prices and reduced consumer welfare.

Example – Patents

Provide innovators exclusive rights for 20 years to encourage innovation but may also delay diffusion of new technologies.