Understand how to evaluate welfare and economic efficiency.
Example Policy Questions:
Should we raise the minimum wage?
Should carbon be taxed?
Should college be free?
Should cities require mask-wearing during airborne disease outbreaks?
Should the speed limit be higher?
Should we reduce trade barriers with China?
Positive Analysis (Stage 1):
Focuses on what will happen with a policy.
Involves objective analysis using tools like the supply-and-demand framework.
Example: Analyzing the consequences of increasing minimum wage (e.g., number of people receiving raises, impact on employer profitability, job elimination).
Normative Analysis (Stage 2):
Focuses on what should happen; involves value judgments.
Requires assessing outcomes and weighing benefits against costs.
Discussion on minimum wage: should it be raised or not involves normative judgments regarding gains and losses across groups (workers, businesses).
Need for criteria to judge the impact of policies on welfare and prosperity.
Economic Efficiency:
More economic surplus generated is preferred: surplus = benefits − costs.
Efficient outcomes may not distribute benefits equally.
Example: Uber enhances economic surplus at the expense of taxi drivers.
Enhancing economic efficiency doesn’t guarantee happiness for all.
Policy outcomes affect economic surplus differently across participants; some may benefit while others are harmed.
Compensation Mechanisms:
Possibility of compensating those harmed to ensure overall benefits.
Assess the efficiency of markets as central organizing institutions.
Markets determine production patterns, income distributions, and pricing.
Comparison to centrally planned economies (e.g., Cuba, North Korea).
Who Makes What?
Efficient production minimizes costs via self-interest dynamics.
Example: Allocating production between smaller farms and larger industrial operations.
Who Gets What?
Efficient allocation maximizes benefits for consumers, assigning goods to individuals willing to pay the most.
Market dynamics ensure goods are distributed to those who value them most.
How Much Gets Bought and Sold?
Rational Rule for Markets:
Produce until marginal benefit equals marginal cost for surplus maximization.
Equilibrium Quantity:
Achieved when supply equals demand, resulting in maximal economic surplus.
Understand costs associated with market failures.
Definitions:
Market Failure: Inefficiencies in market outcomes.
Deadweight Loss: Loss in economic surplus due to suboptimal production quantities.
Market Power:
Reduced competition leads to higher prices and underproduction.
Externalities:
Negative side effects (e.g., pollution) lead to overproduction of harmful goods.
Information Problems:
Asymmetry affects buyer trust and market efficiency.
Irrationality:
Poor decision-making leads to inefficient outcomes.
Government Impediments:
Regulations and taxes can distort market equilibrium.
Calculated as the difference between efficient and actual economic surplus; highlights loss due to deviations from efficient production levels.
Evaluate limitations of economic efficiency in policy decisions.
Distributional Concerns:
Focus on efficiency may overlook fairness in the distribution of benefits.
Willingness vs. Ability to Pay:
Willingness to pay can reflect access to resources rather than true marginal benefit.
Process vs. Outcomes:
Ethical considerations around how decisions are made can be as important as the final outcomes.
Employ economic efficiency as a tool, but complement with equity and ethical considerations in policy discussions.
Positive Analysis:
Effects on employment and wages; increase in rides and decrease in wait times.
Normative Analysis:
Weighing economic surplus from ride-sharing against potential equity concerns for taxi drivers.
Policy Implications:
Continuous evaluation required to balance benefits and losses; different stakeholders may have varying perspectives on value judgments.