Deck 23: Microeconomic Policy, Economic Reasoning, and Beyond

Question 1

Does politics always make a positive contribution to economic policy? Why or why not?

Answer 1

No, politics does not always make a positive contribution to economic policy. Political decisions do not always reflect the will of society. Political decisions are often made on the basis of short-run emotional considerations rather than long-run benefit/cost considerations.

Question 2

Give two reasons why economists have different views on social policy issues.

Answer 2

Any two of the following are acceptable. Three reasons economists have different views on social policy issues are: (1) their views on social policy are influenced by their subjective value judgments as well as their objective economic analysis, (2) policy must be based on imprecise empirical evidence, so there is room for different interpretations as to what the evidence suggests, and (3) policy proposals can be derived from different economic models, which focus on different aspects of a problem and ignore some aspects.

Question 3

What are Pareto-optimal policies? Can you give an example of one?

Answer 3

Pareto-optimal policies are policies that benefit some people and hurt no one. It is virtually impossible to come up with a real world example of a Pareto-optimal policy because policies inevitably have side effects that end up hurting someone.

Question 4

Why should we be very careful about any cost/benefit analysis?

Question 5

Three reasons why economists have different views on social policy issues are: (1) their views on social policy are influenced by their subjective value judgments, (2) policy must be based on imprecise empirical evidence, and (3) policy proposals can be derived from different economic models. Discuss each of these reasons.

Question 6

Why is it unlikely that government will be able to correct a failure of a market outcome?

Question 7

Suppose a professional baseball catcher has heard about a new "super deluxe catcher's mask that is guaranteed to protect catchers from being permanently brain damaged by a foul ball to the head." This mask costs $750 and Alias Sports Bureau (a baseball statistics company) has issued a report that using this mask will lower a catcher's risk of serious brain damage due to a foul ball to the head from 2/250,000 to 1/250,000. The baseball catcher eagerly buys this mask. By purchasing this mask, what is the implicit value the catcher is placing on his brain?

Question 8

What does it mean to say that a market outcome is a failure?

Question 9

What are the three ways that economists' value judgment creeps into their analysis?

Question 10

Despite their different political views, liberal and conservative economists agree on many policy prescriptions. Explain why.

Question 11

When economists with different political views do cost/benefit comparisons, they often reach different conclusions. If their analysis were based on objective costs and valid techniques, why wouldn't they reach similar conclusions, even if those conclusions conflicted with their political beliefs? Explain.

Question 12

Why do we say that competitive markets are efficient?

Question 13

What three things must the government do in order to correct a failure of the market?

Question 14

Describe two types of failures of market outcomes.

Question 15

How does the approach used by most economists to analyze regulations differ from that typically used by politicians? Explain.

Question 16

How does the approach that most economists use to analyze regulations differ from the approach that is typically used by politicians? Explain.

Question 17

When does the government contribute positively to economic policy? When does it contribute negatively?

Question 18

How does the "failure of a market outcome" differ from a "market failure"? Failures of market outcomes include distributional issues, rationality problems, and problems associated with inalienable rights. Discuss each of these failures.

Question 19

Economists' cost/benefit approach to public policy requires them to assign a monetary value to all gains and losses of everything, including life. This is controversial and difficult, and may introduce biases. Explain why.

Question 20

Define the mainstream model, the public choice model, and the Marxian model, and show how their analysis differs in the case of labor markets.

Question 21

The government is contemplating legalizing, and then taxing crack cocaine. Would the government prefer that the demand for crack cocaine be elastic or inelastic? Explain, using supply and demand diagrams.

Question 22

Consider the following supply and demand diagrams. (a) Compute the amount of consumer plus producer surplus in each case.
(b) Which outcome would the majority of society prefer? Explain.

Question 23

The Safety Commissioner for the state of North Dakota is contemplating requiring anyone who applies for a hunting license to take a gun safety class. The state's insurance commissioner has determined that taking this course will reduce the likelihood of a self-inflicted mortality by 1/1,000,000. Recent work by an economist at the University of North Dakota indicates that hunters in North Dakota value their lives at $5,000,000. Since the Safety Commissioner is up for re-election soon, he wants to make sure the cost to hunters of the program is not too high. What price should he charge hunters for this safety class? Why might N.D. offer the course for less than the expected benefit to hunters? Explain.