PBPL001 Flashcards

Why do people work?

To earn money to buy things

* Foods, wants, needs

Find meaning in life

* Self-actualization

What determines what people buy?

From an economist’s perspective, price, income, and preferences

What determines an individual’s income?

Scarcity of skill

* NBA player

Education

* Masters

Luck

* If presented with a situation that falls into your lap, take it

What is a market?

Any place where 2+ parties can meet to engage in an economic transition

* Meet freely to exchange goods
* Can involve goods, services, currency, or combination

Socialism

When production and the market is controlled by the government

* The government determines the availability of products, number of products, etc.

**The belief that the government should control the market**

Capitalism

**The belief that individual markets should decide on the market**

What is GDP?

Gross domestic product

* The sum of value of everything we produce
* All goods and services produced in a country

Per Person Value of Production

Divide GDP by everyone in the country

Which market determines more GDP per capita/societal growth?

Capitalism

Real/Inflation Adjusted or Constant Dollar

Adjusting your income levels for the prices that you pay

* In the case of if you want to buy things

How much wealthier we are today compared to the 1950s?

4 times more wealthy

How does the economy take off?

If you allow markets to determine consumption and production

* China became an agrarian state to a middle income country with the introduction of capitalism

Allowing producers to produce in respond to what people want, instead of the government controlling everything, is prosperous for the economy

Which countries rely on the government and not markets?

* Nicaragua
* Venezuela
* Cuba
* Soviet Union
* North Korea
* Mao’s China

Socialism in practic

Those who have tried to get the government to control the market and produce people buy

Socialism as a political slogan

Like Bernie Sanders who calls himself a Democratic Socialist

What do countries that practice socialism have in common?

Low GDP and few protections of individual liberties

* Soviet Union - Gulags
* When Stalin took over, independent farmers were seen as political opposition
* Depopulated the countryside and made gulags
* Mao - Starved millions of people in the 50s
* Venezuela - Population peaked at 20% higher as it was a failed state
* Cuba - No protection of individual liberty
* North Korea - No freedom of speech/protesting

What does capitalism lead to?

Personal liberty

Reliance on markets…

Does not imply anything about a country’s political system

* People in China cannot protest about their COVID policies despite being a capitalist country
* Can have market reliance and political repression with a one-problem rule
* Friedman argues that reliance on government is most consistent with loss of political freedom

What is public policy?

Actions that public officials take that impact society

Public official

A person with authority conferred by the state

* Typically paid for by tax payers
* Part of a government agency
* A position with legal authority to make a decision

What is a decision made by a public agency?

Public policy

What do public officials want to accomplish with their policies?

* Solve public problems
* Gain political power
* Reward their supporters (corruption)

Examples of public problems

Have not or cannot be solved by private entrepreneurs or are perceived as a responsibility of society to solve

* Spread of infectious diseases (COVID, Zika, Malaria)
* Hungry/malnousished children
* Lack of public transportation
* Air pollution
* Inabiliyt to access healthcare

What are private problems?

* How should I get to work?
* What kind of car should I buy?
* What crop should I plant?
* What paint should my company produce?
* Should I study or work more?
* What should I eat tonight?

Government control of decision making in society…

Varies widely across countries and states

What is laissez-faire?

Transitions between private groups of people are free from economic interruption

What do strong central governments control?

Strong central governments have control over private decisions and public problems

* North Korea, Cuba, ex-Soviet Union

Mostly targeted government intervention…

Is when government tries to solve only public problems

Mixed government intervention

Government intervention in both public and private problems

* United States

Means of production in capitalism

Owned by individuals, not government

A trait of capitalism

Prices for goods and services are largely determined by market forces

* Consumers are free to buy or not buy
* Producers of goods free to produce and sell or to not
* Prices paid by consumers and recieved by producers “clear” the market
* “Clear” - no shortage or surplus

What happens if more more people want to buy a produce than there is for sale (shortage)?

* Prices tend to rise
* Higher price = less people want to buy
* High price signals for producers to produce more for more profit
* Price will rise until no more surplus

What happens if sellers have more products than buyers want to buy (surplus)?

* Prices tend to call
* Low prices = buyers want to buy more
* Low prices will reduce seller profit and less will be produced

Self-interest

Allowing people to freely buy or not buy, produce and sell or not produce and sell

Invisible hand

A metaphor for how in a free market economy, self-interested individuals operate through a system of mutual independence

* Except in rare circumstances, neither shortages or surpluses will last long

When is wealth generated?

* When consumers buy something for a price less than the max they are willing to pay
* Producers sell something for more than it costs to produce; make a profit

Is self interest enough for wealth creation?

No, self interest alone is not enough for wealth creation

What are the key roles for government policy in all capitalistic societies?

* Set up a strong legal framework (rules of the game)
* Interpret the rules of the game (be the umpire)
* Mediate differences
* Set up procedure to change the game
* Anticipate and diffuse conflicts between citizens who are pursuing their chosen courses in life

What does policy do to make wealth creation?

* Define and defend property rights
* Patents, royalties, ownership of land, equiptment
* Set up a stable and predictable monetary system to facilitate trade

What is the basic role of public policy?

* To deal with public problems
* Even if no one wants it to be dealt with
* To help if markets cannot generate wealth

When do market failures happen?

When the market outcome does not maximize wealth

What is wealth maximization?

* Sum of wealth of buyers and sellers from a transaction cannot be higher
* Of course, that can’t always happen
* **When a happy median of consumer and producer are met**

What are market failuires?

1. Insufficient competition
2. Externalities
3. Too few public goods

Market Failure #1 - Insufficient Competition

As competitors can take control of the market by having low prices, having lots of competition makes prices high

* If there is no competition, prices will remain high
* Abnormally high prices is not wealth maximizing because a low price would benefit buyers more than it would hurt sellers
* Government intervention is needed

Market Failure #2 - Externalities

Externalities are indirect cost or benefit from a third party as a result of another party’s activity

* Costs and benefits from production and consumption are external to buyers and sellers
* A coal powered power plant will run only if the price of electricity is enough to pay for all of the resources to keep it running
* While the only costs considered by the owner is labor, coal, etc, there are external costs
* CO2 emissions in association with global warming
* Particulates (SO2) which decerase human health

What is the Social cost of Production

The value of society's resources devoted to the production of a good

* The funds for a new Apple store could have gone to more marketing

What is the Social Benefit of Consumption?

The willingness to pay of a consumer

What does wealth maximization require?

Incremental social benefit = incremental social cost

What are social costs?

Private costs + value of externality

What is a value of externality?

The damage suffered by those not party to the market transition

Scenario for a negative externality

If the owners of the coal-powered power plant have to pay for pollution costs, they would need to pay more

* Would give advantage to those who are in the clean energy market
* Coal’s share of electricity market would drop and coal would make less than the renewable energy sources
* Government has to come in and make the coal people pay for their pollution

Examples of externalities

Water pollution, noise pollution, congested traffic, second-hand smoke

Example of positive externality

Vaccinations

Are negative externalities “real” costs?

Yes, economists can put a dollar amount on the impact of externalities

* People just choose to ignore the externalities
* Where government needs to step in with public policy, but some politicians don’t believe in them

Market Failure #3 - Too Few Public Goods

Not many benefits available for everyone to enjoy

What is a public good?

* Typically provided by the public sector
* Not all goods are provided by the government

Attributes of a Pure Private Good

1. Excludable (only people who buy it can use it)
2. Rivalrous (once the good is consumed, no one can consume it again)
3. Markets supply them well

Examples of pure private goods

* Food
* Guitars
* Insurance
* Phone
* Furniture
* Most goods are private goods

What are pure public goods?

1. Non-excludable


1. Non-rivalrous

Pure public good examples

* Basic research
* Parks
* Fire protection
* Law enforcement
* National defense
* Clean air
* Over the air TV and radio
* Public health services
* Food safety standards
* Data collection and storage

Why do markets underprovide goods?

To not incentivize free riding which will overall lead to decreased profits for them

Free riding

When others “piggy back” on the purchases of others

Examples of free riding

* Group projects
* Radio

Club Goods

Goods that are excludable but non-rivalrous

* People will make a club to offer those goods
* Example - Utilities as natural monopolies

Natural monolopy

Situations in which it just makes sense to have a single firm control that sector

* Example - Water usage owned by the city

Common access resources

Rivalrous goods that are non-excludable

* All of us have access to it, but it is rival
* Example - San Joaquin Valley and overpumping groundwater
* Residents in wells don’t have water in their wells with overpumping

Rivalrous + Excludable

Private goods

* Food, clothes, cars, personal electronics

Excludable + Non-Rivalrous

Club Goods

* Cinemas, private parks, satellite TV

Rivalrous + Non-Excludable

Common Goods

* Fish stocks, timber, coal

Non-Rivalrous + Non-Excludable

Public Goods

* Air, national defense

What does sole reliance on markets mean?

* Too little population control
* Too few public health measures
* Inadequate public spaces
* Inadequate public transportation
* Too little public safety
* Too little competition

What should happen when private markets fail?

The government should get involve to solve those market failures and create public policy to do so

What does sole reliance on markets mean?

* Prices are too high because of little competition
* No accounting for externalities
* Little population control
* Little public health measures
* Too few public goods
* Inadequate public spaces
* Inadequate public transportation
* Too little public safety
* Over exploitation of common access resources (fisheries, groundwater)

It is agreed that…

* Markets are best at providing goods and service


* Markets should be taken into account

World Trade Organization

An attempt in the 80s and 90s to unify the basics of operation of economic trade between countries

* Directed towards organizations like China and Africa and aimed to introduce them to trade

Human capital

The economic value of skills and training in people

* Enhancing the abilities for humans to things and be better for society

Does the US invest enough in people?

No

* Lack of food, shelter, schools, healthcare leads to people unable to reach their full potential and lead to a betterment in society

What does lack of opportunity lead to

To lower productivity in life which leads to lowered productivity in society

Joseph Stiglitz

A professor of Economics at Columbia and won a Nobel Prize in 2001

* Advocated for their idea that economic efficiency comes from investing in people

What is greater income inequality associated with?

Lower intergenerational wealth

Intergenerational income mobility

The degree to which an individual’s position in the income distribution persists or changes from one generation to the next

* People should have the same opportunity to move up the socioeconomic ladder as people move down from it

Example of lack of equality of oppertunity

You are a bright person with high potential, but remain in the level of poverty in which you were born in

Great Gatsby Curve

Less mobility and inequality go hand in hand

* US has lower intergenerational mobility than countries like Canada Australia, and New Zealand

Where is gender inequality?

In all fields at every education level

* Has decreased in more rural areas

Racial inequality

Whites earn more than Hispanics who earn more than blacks

Countries with strong social supports through policy…

Have less inequality and more mobility

What is liberalism?

The pursuit of people with liberty

* People will be governed based on how they want to be governed

John Locke

The father of liberalism

* Lived during the transition from monarchy to supremacy of Parliament
* Student of the enlightenment that moved away from divine wisdom of kings and gods to people
* Power form the church to the people

What are the risks of government coersion

Risk to people’s personal liberty

The government can be…

A force of good or bad

Liberalism

* Based on the rights of the individual, liberty, consent of the governed, policy equality, and equality before the law
* Support private property, market economies, individual rights (civil and human), liberal democray, secularism, rule of he law, economic and political freedom, freedom of speech, freedom of press, freedom of assembly, and freedom of religion

Who are liberals?

Milton Friedman and Joe Stiglitz

What is Friedman’s philosophy?

That government trying to help could cause harm to those it was helping

What did Republicans oppose?

Social Security, Medicare, Medicaid, food assistance, labor law, worker, safety, product safety, etc.

The effort to expand role of government was a belief by Democrats that…

Laissez-faire government lead to Great Depression, human misery, and that a new social contract was needed to let capitalism continue

What happened in 2008?

Obama became president and the Republican party turned away from liberalism

Illiberal Democracy

Described a governing system in which although elections take place, citizens are cut off from knowledge about the activities of those who exercise real power because of the lack of civil liberties and civil institutions; not an open society

Illiberal Trends in Federal Government

* Undermine civil institutions
* Breach wall between church and state
* Disregard for science (COVID vaccines kill)
* State control over education
* Lack of peaceful transition of power
* Attempts to control judiciary and elections to gain power

What is liberalism based on?

Rationality, empiricism, personal liberty

* The government only has legitimacy with assent of the governed

Good government…

* Lowers market transition cots
* Provides goods and services private markets don’t offer
* Regulate markets in account for externalities
* Makes recessions less damaging
* Increases equality opportunity for everyone