1. Economic Analysis and Public Policy Session 1 Introduction & Overview Christopher Grandy 6/13/11

4. Course Overview Syllabus

15. Economic Analysis and Public Policy Sessions 2 and 3 Competition & Efficiency Gathering Information Christopher Grandy June 13-14, 2011

18. Illustration of Pareto Efficiency Person A Person B 0 0 Moo Satay Pad Thai Set of Pareto Efficient Allocations

20. Illustration of Competitive Markets & Pareto Efficiency Person A Person B 0 0 Moo Satay Pad Thai

21. Bottom Line Because each person is doing as well as s/he can (each is on the highest indifference curve possible) GIVEN the starting position and the price, there is NO role for policy in improving this allocation of resources without hurting one of the participants.

24. Illustration of Consumer Surplus Price Quantity D P 0 Q 0 Consumer Surplus

26. Illustration of Producer Surplus Price Quantity P 0 Q 0 S Producer Surplus (also called “rent”)

28. Illustration of Social Surplus Price Quantity D P 0 Q 0 S

30. Illustration of Change in Social Surplus Due to Price Reduction Price Quantity D P 0 Q 0 S P 1 Q 1 Loss in Social Surplus (Mainly due to loss in producer surplus)

37. Economic Analysis and Public Policy Sessions 4 and 5 Market Failures I: Public Goods & Externalities Christopher Grandy June 14-15, 2011

40. Public Goods Public Goods are those that lack either rivalry (they are nonrivalrous) or excludability (they are nonexcludable) or both. Consider these examples:

42. Public Goods: Type I Rivalry & Nonexcludability Quantity of Fresh Water Price of Fresh Water D MPC Includes the cost of gathering and transporting the water and the reduction in stock of water for this individual only. MSC Includes cost of gathering and transporting, but also reflects reduction in stock of water available to all. Q P P P Q S P S Socially optimal consumption Equilibrium private consumption

47. Market Demand for Rival and Nonrival Goods Rivalrous Good Q P D 1 D 2 D P Q Nonrival Good D 1 D 2 D Market Demand is the horizontal sum (over quantity) of individual demand Market Demand is the vertical sum (over price) of individual demand

48. Public Goods: Type II Nonrivalry & Excludability Toll Number of Travelers D S When toll road is not congested, supply exceeds demand at a zero price. Everyone can travel for free. But how is the toll road paid for? Charge a toll and accept underconsumption? Tax everyone & allow all to travel? 0

49. Public Goods: Type II Nonrivalry & Excludability w/ Congestion Toll Number of Travelers D At some point, each additional traveler imposes costs on others. A fee reflecting those costs may be appropriate. But this does NOT solve the problem of how to pay for toll road itself. 0 S P 0

56. Positive Externality: Education Education P S MPB MSB If parents only pay attention to the benefits to them of educating their child, then they are on the Marginal Private Benefit curve, and will choose education level E 0 . However, if education has positive socialization effects (encouraging cooperation, less violence, etc.), then there are benefits which accrue to others. And MSB is the relevant curve. The optimal level of education is then E*. The parents don’t spend enough on education at E 0 . May justify public subsidies for education. E 0 E*