Fall 2018 - 60999 - PA 393K - Applied Microeconomics for Policy Analysis
Applied Microeconomics for Policy Analysis
Everyone knows that some knowledge of economics is necessary for effective regulation of the economy and that economics can help to explain primarily economic phenomena such as land use patterns, bond rates or inflation. Policy analysts and public managers often need to make decisions about suchlike, and economics gives them the tools they need to make sense of a messy world.
More important, however, the thought patterns and modeling structure of microeconomics help policy analysts and managers make sense of a wide variety of problems that have little to do with money. Some examples:
What is the most efficient size for an elementary school class? If classes are too small, taxpayers lose by paying too many teachers. If classes are too large, students lose because they don’t learn as much. Economic principle: diminishing marginal returns.
Why is it so hard to find the books you want in used book stores? Why do new cars depreciate so quickly? What were the Charlotte Hornets thinking when they traded Kobe Bryant to the Lakers for Vlade Divac in 1996? Economic principle: asymmetric information and the “lemons” problem.
Why are whales on the verge of extinction? Why does traffic jam up for miles behind an accident? Why is it so much easier to pass a prison bond issue than a school bond issue? Economic principle: externalities and the “commons” problem.
I suspect that, for many of you, these principles may ultimately prove more valuable than the substance of classical price theory. Nonetheless, working through the substance is a good way to make sense of the principles, so in this course we’ll consider both.
A third reason for considering microeconomics is also compelling: It’s the best defense against economists with their own axes to grind. In many public policy arenas, economists are even more ubiquitous than lawyers. Each side’s economic team demonstrates that the benefits of their preferred policy exceed the costs by an order of magnitude or two. None of them agree on anything. You— a humble LBJ grad—must sort out the opposing opinions of these presumably well-trained Ph.D.s. With a working knowledge of economics, you have a fighting chance. Without one, your decisions are liable to be as unpredictable as an NBA referee.
More specifically, we’ll be talking about consumer decisions and demand, producer decisions and supply, how competitive markets work and sometimes fail, and how to use market principles to conduct benefit-cost assessments. Knowledge of calculus will be very useful but not necessary. To help you work through all this, you’ll complete five extended problem sets (four of them structured, one of them free-form) and a take-home final exam.