Public Policy & Economics: Key Concepts and Market Failures

What is Public Policy

binding upon all affected parties, whether they agree or not

Policy analysis

analyzing a social problem and implementing a solution that is effective and politically feasible

Evaluation criteria to consider in policy analysis

human dignity, equity, efficiency, fiscal impacts, political feasibility

Draw the direct indirect monetary stuff

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What is government spending a common indicator for?

governmental functions and priorities, but context and how those choices are made is important

Why do problems persist?

Limits on govt power

Disagreement over the problem

Subjectivity in interpretation

Limitations on design of human research

Complexity of human behavior

Values

beliefs rooted in faith, experience, or ideology

Facts

objective reality or truth informed by observation, measurement or calculation

Theory

general principles supported by data or analysis, subsequent inquiry can prove or disprove

What governments do in terms of market making

taxes, subsidies, regulation

What do govts do other than market making

managing risk (contract specification, negotiation, and monitoring), info and social marketing, direct service supply

Governmental objectives?

Human flourishing, effective institutions, efficiency, sustainability, advancing human rights, social equity

Difference between rational and incremental model

all possible solutions vs. most familiar problems

Law of unintended consequences

analyst neglects to anticipate how stakeholders will react a policy change; reduces policy effectiveness or imposes unexpected costs that outweigh the anticipated benefits

Perverse incentives

"cause harm": policy change incentivizes stakeholder behavior that can cause harm

Distributional effects

the impact of a policy change has on different groups

Reasons why market is not delivering desirable outcome

Lack of competition

Transaction costs

Externalities

Information asymmetry

Public goods (and/or other collective action problems)

Equity and redistribution of resources

Paternalism

Three categories of institutions

For-profit firms

Public and Non-profit institutions

Government

Aspects of institutions to consider

Mission

Environment: what support/opposition? What legitimacy? Competitors?

Performance Measurement

Technology: What kind of technology (service-delivery, regulatory, people-changing, project), strong or weak

production/delivery processes: what processes are involved in producing output

Frontline workers and co-producers: good workers? How are they supervised and supported? Reliance on co-producers?

Partners and other outsiders

Centralization/decentralization: effective balance?

Culture and communications: strong or weak culture (US navy vs. public health dept), unconstrained communications?, values?

Politics: factions? competition/conflict?

Leadership" how maintain legitimacy, effectiveness, functions, strategies to carry out functions

Change: continuous improvement? motivation and capacity to look for signs of opportunity or danger?

What if we want to make a policy change?

Privatization

Public financing

Public provision

Contractible quality

Well defined project objectives

Quality of good or service is easily observable and measured

How do we assess success

Utility: measure of well-off-ness, how utile

Indicators and indexes

Consumption of goods and services; wealth measures

Absolute wellbeing

define basic needs, remains constant over time

Relative wellbeing

comparative disadvantage, changing standards of living

Efficiency

the degree to which resources are used to generate the most productive outcome

Pareto efficiency

impossible to make any person better off without making someone else worse off

Markets make most productive use by?

maximize social surplus, through law of supply and demand

Consumer surplus

the difference between what u paid and what you are willing and able to pay

Externality (in terms of consumer and producer surplus)

price does not include costs imposed on others, can increase consumer surplus with tax

Monopoly (in terms of consumer and producer surplus)

price artificially high, consumer surplus

Market economy (in terms of consumer and producer surplus)

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

Market idea only works if...

Only if govt enforces property rights

Ability of individual to own and exercise control over scarce resources

Two reasons for govt interfere: promotion of efficiency and equity

Govt policy improve efficiency when market failure

Market left on its own fails to allocate resources efficiently

When a govt interferes in the market and prevents price from adjusting, household and firm decisions become distorted

Equity

Measure of fairness

Distribution of benefits and costs across individuals in society

Horizontal equity

measure of degree to which similar persons and situations treated equally

Vertical equity

different people and situations treated appropriately differently

Intergenerational

how diff ppl and situations treated between generations

Difference between efficiency and equity

Efficiency is making the biggest possible cake, equity is about ensuring that each person's slice is of an equal size

Whats meant by social construction of problems

Problems are not entirely objective, have subjective and objective components

Social framing is subjective, varies by groups

What is a social problem?

State of world that is undesirable and govt intervention is appropriate

Difficult and unlikely to be resolved by individual action

Dimensions of a problem

Causation/Mechanisms

Tractability

Tangibility

"Diffuse"or ïnvisible"problems?

Magnitude and Complexity

Severity

Does it deserve space in an already crowded governmental agenda?

Tips for defining

Thinking in terms of excess or deficiency

Useful because easy to measure/see how effective a policy measure is

Make it evaluative

Don't focus on wrong, identify market and/or govt failure

Market failure: monopoly, externalities, public goods, info asymmetries

Beyond market/govt failures:

Quantify

Helps to answer natural questions about magnitude

Causes of problem

No solutions, leave open the search for solutions

Iterate, may need to rewrite problem to capture info learned along the way

Problem statement criteria

No causal elements or solution

Define boundaries

Geography, population, phenomena

Describe magnitude

Common forms of market failure

Monopolies

Externalities

Public goods

Info asymmetries

Monopoly

buyer/seller has too much power over price

Externality

actions of consumer/producer help or harm third party

Drive wedge between private and social benefits and private and social costs

Borne by third parties (or society)

Private benefits + external benefits = social benefits (same with costs)

External benefits and costs not perceived by buyers or sellers -> not captured by market

Public goods

a good may not be profitable for company, but necessary for society

Info asymmetry

consumer unable to make informed choice because of the complexity of the decision

Barrier of entry caused by three sources

A single firm owns a key resource

The govt gives a single firm the exclusive right to produce the good

Economics of scale: single firm can produce entire market at lower cost than several firms

Patent

awards inventor exclusive right to produce good or service for 20 years

Encourage inventors to invest time and money to develop new products or processes

Incentives to turn into marketable product

Policies towards monopolies

Try to make monopolized industries more competitive

Regulate behavior of the monopolies

Turn private monopolies into public enterprises

Policies towards externalities

Taxes and subsidies for negative or positive externality

Regulation: limits, rews, government takeover, permitting

Coase theorem

if private parties can bargain over the allocation of resources, they can solve the problem of externalities on their own

Assumes property rights are clearly defined and transaction costs are low

Against coase theorem

Transaction costs: process of agreeing = friction, then monitoring, if many parties then coordinating is hard, costly, or impossible

Stubbornness: even if beneficial agreement is possible, each party may hold out for better deal

Clear property rights: clearly defined, exclusive, enforceable, and transferable

Other policy based solutions to externalities

Command-and-control policies: regulates behavior directly, limits on quantity, req to adopt a tech

Corrective tax: induces private decision makers to account for social costs, corrective tax = external cost, Pigouvian taxes

Market-based policies: incentives for private decision-makers to solve problems, tradeable permits

Draw public vs private good table

i cant upload anything so imagine the right answer

Tragedy of the commons

people wont/cant organize to make themselves better off in the long run (ie Ocean fishing)

Free rider problem

if people cannot be excluded, they have little incentive to pay for good or service, market doesn't work efficiently, anonymity and large number of people makes it worse

Policy responses to free rider problem

Government provision

Government funding but private provision(non profit and for profit provide)

Dissatisfaction problem: individuals don't choose quantity they want to buy, it is collective purchase

Properties of info

Costly, easily distributed, public good, durable, differing costs of acquisition, problems of misinfo

Lemon/car problem

Lemon/car problem: sellers more likely to sell below average cars if they have them -> buyers know lots of below average cars on market and lower reservation prices -> because used car prices low then good cars are kept for longer by owners -> quality of used cars falls further -> on and on

Costly to fake principle

to communicate info credibly, a signal must be costly or difficult to fake

Adverse selection

Individuals use private info to sort themselves into or out of market transaction

Happens when insurance contract sold/signed

High risk indv -> pay higher price

Same price looks more attractive to high risk indv

Government enforced insurance policy may lower premium in market

Moral hazard

When individuals or firms that are protected against loss act with less caution than they would have otherwise, making bad outcome more likely

Tendency of people to expend less effor protecting those goods that are insured against theft or damage

Deductibles used to reduce moral hazard and adverse selection

Other benefits: lower rates, increased incentive to drive safe, reduce claims and therefore premiums

Addressing info problems

Branding: builds an identity for their products and info abt quality durability, safety

Signaling: engaging in activities with no direct value but "signal"info to other party (education credentials

Certification

Screening: designs mechanism to elicit private info from other party

Government failure reasons

Problems of direct democracy

Majority impose costs on minority

Proclems of representative democracy

Organized groups, special interests

Problems of govt production and supply

Admin burdens

How can we address government failure

System redesign bc...

Relying on coordination through decentralized, private action remains unfeasible

Government as market maker, direct service supplier, regulator, impose taxes, gives subsidies, facilitator, and more

Why is it good to search for past solutions?

idk reason through it

Evidence based

validated by forms of documented scientific research or findings established through previously conducted research, and not anecdotal evidence

Phrase about assembling evidence

People lead to people

People lead to documents

Documents lead to documents

Documents lead to people

What is important about bias and evidence

Awareness of our biases can influence search

Causal/explanatory research:

allows causal inferences to be made

Three things that make effect causal

Temporal sequence: appropriate causal order of events

Non-zero correlation: two phenomena vary together

Nonspurious association: an absence of alternative plausible explanations

Ethics and experiments

Debrief subjects after procedure because it returns the subjects to their normal state

Could inadvertently cause damages

Validity issues

Internal validity

the possibility that conclusions drawn from experimental results may not accurately reflect what happened in the experiment itself

External validity

the possibility that conclusions drawn from experimental results may not be generalizable to the real world

Naturally occurring randomization

You don't have to impose negative effects

Natural experiments are not truly random

Raises external validity (trade off)