Public Policy 101 (Midterm 1)
Terms in this set (77)
all of the industrialized world/most of developing world have economies that represent
some mix between free market and government intervention.
mixed economies usually require property rights be enforced through the nation's legal system.
proportion of US workforce employed by the public sector:
approximately 16% (nearly 1/6)
public assistance programs
refers to all programs where an individual receives assistance if they are poor enough to qualify (there are 2 alternative means of delivery of public assistance)
cash assistance programs
this is one alternative means of delivery of public assistance through CASH PAYMENTS. an example would be the cash payments entailed in the Temporary Assistance to Needy Families (TANF) program, the main federal welfare program for poor families with children. another example would be the General Assistance program (GA).
in-kind assistance programs
this is the second alternative means of delivery of public assistance. the aid comes in the form of the direct provision of a good or of a grant that can only be spent on a specific good. (ex. food stamps; housing assistance for residence in a public housing project; section 8 housing voucher)
means test (for program eligibility)
two hurdles must be met in order to receive public aid. the first hurdle is that each public assistance profess has a MEANS TEST; this refers to the criteria for eligibility (i.e. income/asset levels must be low enough given your family size to be eligible for a program)
social insurance programs
these are programs that provide benefits to the retired, disabled, unemployed, or the sick. they are referred as "social insurance" programs because the benefits are often tied to having paid into the system and how much was paid into the system. (ex. social security, unemployment insurance, workers compensation, and disability insurance).
how big are government expenditures relative to GDP?
government expenditures currently account for roughly 40% of GDP.
how much is federal government spending as a proportion of GDP?
how much is state and local spending as a proportion of GDP?
government intervention is usually justified based on either efficiency or equity grounds. with efficiency, we generally ask whether it is possible from the current state of affairs to make someone better off without making someone worse off. if it is possible, then there is room for a deal and we are not using our resources to their maximum potential (i.e. not efficient)
-a given level of production distribution of goods, employment of workers and capital, and distribution of income will be defined as efficient if we cannot make someone in society better off without harming another person.
-no room to improve = efficient state of being
AKA EFFICIENCY IS AN ABSCENSE OF AN ABILITY TO IMPROVE
government intervention is usually justified based on either efficiency or equity grounds. with equity, this refers to the equity in outcome or equity in process; sometimes, we may wish to sacrifice some efficiency if it means we will achieve an equity goal as a result.
if we have currently achieved efficiency, any change we might consider necessarily involves a tradeoff in the interest of one person or group against the interests of another person or group. one person could have everything and the rest none, and could still be considered "pareto efficient."
first fundamental theorem of welfare economics
this theorem finds that in a world with a competitive economy (with lots of producers, consumers, perfect info, few costs for economic transactions), decentralized decision making, and by extension, free markets, will lead to economic efficiency.
in other words, under competitive conditions, government intervention that impacts prices and distorts markets will generally create inefficiency (or room to improve social welfare)
-suggests gov. intervention is bad and that decentralized outcomes from given starting conditions are the best way to organize society
second fundamental theorem of welfare economics
says that every efficient resource allocation can be obtained through a competitive market process with an initial redistribution of wealth
if one could move toward more efficient outcomes society should be better off on net. (separates efficiency and distribution matters.)
whatever goods are produced should go to those who value them most
given society's resources, the production of one good cannot be increased without reducing the production of another good. situations that are indicative of productions inefficiency include underemployment and unemployment
productive resources (such as workers) being used in activities that do not fully exploit their capabilities
(ex. a foreign-born driving a cab in a major US city, vs. a trained engineer driving a cab in a major US city.)
-the engineer is engaging in activity which does not fully exploit his/her capability
productive resources (such as workers) are involuntarily idle due to lack of economic activity
product mix efficiency
goods that are actually produced correspond in proportion to the demands of society
Ceteris Paribus assumption
when focusing on specific or individual relationships between one variable and another, we often make the ceteris paribus assumption (i.e. "all things equal.") by assuming that all other factors are held constant, we can look in isolation at the relationship between two variables, and try to disentangle the mess that is reality into its component parts. (unrealistic assumption) BUT WE DO THIS TO MAKE SIMPLIFIED ASSUMPTIONS WHICH HELP ABSTRACT US FROM THE FROM THE DETAIL OF EVERYDAY LIFE.
aims to describe
aims to describe
WHAT SHOULD BE
individual demand curve
graphically displays the relationship between PRICE & QUANTITY for the individual
-the demand curve holds all other factors likely to determine demand constant and depicts the relationship between price and quantity demanded in isolation
market demand curve
-we arrive at the market demand curve when we cumulate the demand for (ex. cigarettes) ACROSS ALL INDIVIDUALS. graphically, we find the market demand curve by placing each individual demand curve side by side and horizontally summing the quantity demanded at each price.
how an we distinguish between INDIVIDUAL level demand and MARKET level demand?
-individual level: ex. amount of cigarettes a given person is willing to purchase
-market level: the total demand for cigarettes by all consumers
the demand curve is downward sloping: WHY?
explanation: it slopes downward implying that as prices rise, quantity demanded falls (i.e. OR as prices fall, demand increases)
why?: 2 reasons...
1. as price drops, those already consuming consume more
2. as price drops, new consumers enter the market
difference in change in demand vs. change in quantity demanded
a change in price causes a movement along the demand curve (which is referred to as a change in the quantity demanded).
a change in other factors that determine demand (such as income or preferences) shift the whole demand curve. (which is referred to as a change in demand).
interpretation of the height of the demand curve as the marginal private benefit (MPB)
the entry price gives the maximum amount that the person is willing/able to pay for the good (and hence, provides a monetary measure of the marginal benefit of consumption).
the alternative interpretation of the demand curve is that the height of the demand curve provides an estimate of the benefit reaped from consuming that last unit of the good.
interpretation of the area under the demand curve as the total private benefit
the area under the curve up to that point gives us an estimate of the total benefit to society of consuming a given level of good, assuming that those who benefit the most from the good (who are located on the upper reaches of the demand curve) receive the goods that are produced and consumed.
this is given where there is no excess supply or excess demand. in other words, the quantity supplied must equal the quantity demanded. (where the supply and demand curves cross)
the role of prices
1. first, the price rations the quantity of the good that are being produced among competing consumers.
2. second, prices are also serving to allocate a certain portion of the economy's scarce resources toward the production of a specific good.
consumer surplus represents the difference between what consumers would be willing to pay for this quantity of the good and what they will actually pay
excess payments to producers above and beyond the costs
producers get a surplus equal to the area below the price line and above the supply curve (which is creatively called the producer surplus)
MPB marginal private benefit =
MSB marginal social benefit
MPC marginal private cost =
MSC marginal social cost
market clearing price
equilibrium in the market is where quantity demanded equals quantity supplied. the market clearing price is the single price that will equate demand and supply (the price where there is no demand and no excess supply)
a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.
we forfeit the area between Q1 and Q*, below the demand curve and above the supply curve.
individual supply curve
the supply curve slopes upward as the quantity that firms wish to sell increases with the price that the markets will offer.
market supply curve
the market supply varies with price for two distinct reasons: 1. the individual producers vary their supply with the price offered by the market.
2. as the price changes various producers will either exit or enter the market.
difference between change in supply vs. change in quantity supplied
all factors not listed on the axes (that is to say that are not either price or quantity) are being held constant. there are many factors that determine supply other than the price of the good.
-impact of changes in the prices of inputs; producers combine inputs to make output. when the prices of these factors of production change, supply will change.
-technology: production of goods depends on production technology. technological innovations occur with some degree of regularity and they are often productivity enhancing.
why does the supply curve slope upward:
bc we would expect a high price to induce greater supply due to the fact that profits per unit are higher and per unit costs may be increasing. in addition, producers that can only produce at higher costs may be induce to enter by higher prices
factors of production
producers combine inputs to make output; to make a car, you need a factory, workers, raw materials, etc... when the prices of these factors of production change, supply will change. increase in factor prices reduce supply as higher factor prices mean that less of the good will be supplied for any given product price. also, declines in factor prices will cause suppliers to produce more all else held equal.`
interpretation of the height of the supply curve as marginal private cost
we can interpret the supply curve in terms of marginal private costs. for a given level of production, the price gives the minimum amount that producers require to supply the last unit of the good produced.
interpretation of the area under the supply curve as total costs of production
the supply curve can also be used to identify the total private costs of producing a given level of the good. if the marginal cost of a producing a unit is the height of the supply curve at a given level, the total production costs is the area under the supply curve between the origin and the amount privately
the role of prices:
1. rationing what is produced among consumers
1. rationing: the first thing to note about the price is that to the extent that everyone faced the same price in the market, only those people who are willing to and able to pay the market clearing price will purchase the good. those who are either unwilling/unable to pay will not. hence, the price divides the world into 2 groups accordingly, and rations the good to those who are willing and able to pay.
the role of prices:
2. sending signal to suppliers that govern resource allocation
those suppliers who can produce the good at or below the market price will do so; those who cannot, will not. hence, prices split producers that can produce at relatively low cost will supply to this market. only producers that can produce at relatively low cost will supply to this market. (decentralized markets generally result in production efficiency in the sense that those who can produce at the lowest costs)
net private benefits of decentralized markets
majoritarian politics (dispersed benefits, dispersed costs)
politics that pit the general public against itself ---> ex. Social Security? K-12? 80% of households with kids will send their children there; even if you don't have kids you still benefit from these educated children
education spending, traffic planning, road construction, infrastructural improvement, etc.
interest group politics (concentrated benefits/concentrated costs)
politics that pit the interest groups against one another ---> people harmed by the change will be extremely harmed while those who benefit by it will benefit greatly (ex. Psychologists now being able to prescribe pharmaceuticals to treat mental illness while psychiatrists will be upset, so interest group against interest group. OR abortion; group for and against will fight it out/interest group against interest group.)
entrepreneurial politics: (dispersed benefits/concentrated costs)
politics that hit the general public against a special interest ---> raising taxes for the 1%; would benefit everyone a little bit - also affect the 1% negatively
client politics (concentrated benefits/dispersed costs)
(client politics): politics that pit special interests against the general public ---> ex. farm subsidies
national origin quota
the 20th century immigration policy in the US prior to 1965...
--there were three key pieces of legislation that characterize the pre-1965 legislation regime:
1. Chinese Exclusion Act of 1882, which explicitly targeted one national-origin group for immigration restriction; this law effectively halted immigration from China to the U.S., and made it difficult for existing Chinese immigrants to return to the U.S. following visits to their homeland.
2-3. Two other key pieces of legislation during this time period were the Emergency Quota Act of 1921 and the National Origins Act of 1924. The 1921 legislation limited annual immigration to the U.S. from any national origin group to 3 percent of the group's resident U.S. population as of the 1910 census. The 1924 act changed the formula from 3 percent to 2 percent and altered the based year to the 1890 census (which preceded the lion's share of the immigrant wave from southern and central Europe). Furthermore, the 1924 act had a provision, which excluded immigration from Asian countries. These pieces of legislation characterize the immigration policies in the U.S. prior to 1965, which some call the "National Origin Quota System." This concept is important to public policy analysis because these pieces of legislation greatly restricted immigration to the U.S. during this time, and effectively halted the first migrant wave of the 20th century.
1965 immigration and nationality act
the national origin quotas were eliminated by the immigration and nationality act. the 1965 act replaced the quotas with a preferential system that allocated visas for permanent lawful migration into the US based on familial contacts in the US and the labors needs of US employers. certain categories or admissions are numerically capped.
the current system of preferences is heavily weighted towards family reunification, and hence, this moniker is often used to describe the US immigration system. if lawful permanent residents were relatives of either US citizens or lawful permanent residents,
the Bracero program provided a vehicle through which literally hundreds of thousands of Mexican immigrants worked legally in the US for short periods of time. many of the workers who migrated seasonally to the US under the Bracero program were recruited from towns and states along a central rail line that ran from the US border to central Mexican states such as Jalisco and Michoacan.
earlier migration from specific origins fuels future migration as the earlier migrants provide the proverbial beaten path for later migrants. the importance of the chain migration helps us in understanding current undocumented as well as documented migration to the US.
immigration reform and control act
this was the first piece of legislation explicitly intended to address unauthorized immigration -- the content of the legislation reflects an interesting political balancing act that attempted to impose law and order while satisfying the concern of agricultural producers regarding their labor needs as well as advocates for undocumented immigrants.
three key provisions of the immigration reform and control act
1. the act made it illegal to knowingly hire an undocumented alien for the first time; punishable fines or even prison time could be imposed on offenders. Employers were thus required to verify the identity and eligibility to work of each person hired.
2. the law created two amnesty programs that adjusted the status of roughly 2.7 million people from undocumented immigrants to lawful permanent residents. The General Amnesty applied to all those who could document residence in the U.S. prior to 1982. The Special Agricultural Workers program applied to anyone who could document 90 days of work in U.S. Agriculture in 1985.
3. the law substantially enhanced border enforcement primarily along the U.S.-Mexico border. This concept is important to public policy because the position the country was in when IRCA was passed is actually quite similar to the current state of affairs; the demand among the electorate for policy that would get a handle on undocumented immigration and bring migration to the U.S. fully under he control of federal authorities is similar today as it was back then. It is important to understand the demand among the electorate in terms of immigration policy to make changes in laws that will impact our future generations.
a system that checks applicant information from the I-9 form against US social security records for certain subsets of employers and impose penalties on both undocumented immigrants working illegally as well as on the employers that hire them. (sought to explicitly limit employment opportunities for the undocumented)
fair labor standards act
the minimum wage was first mandated in the US in 1938 with the passage of FLSA. in addition to introducing a minimum wage, it also introduced the requirement that non-managerial workers be paid time and a half for all hours over forty hours per week as well as regulation regarding child labor.
nominal vs. real dollars
fed. min wage is set NOMINALLY, meaning the specific dollar amount established is not automatically adjusted for inflation. real dollars or the real value of the minimum wage will erode over time unless congress acts and the executive branch signs on to legislation raising the min. wage.
real dollars are adjusted for inflation while nominal are not.
price- taking behavior
If we assume that employers operate in a perfectly competitive labor market (i.e. employers are in fierce competition with other employers for workers and must pay the going wage), than they would never pay more than what is required as this would cut into their profits. In addition, if they tried to pay less than the going wage, then all of their employees would leave them for other firms. What this assumption implies is that employers face the market wage (i.e. W0) and that they can hire as many workers as they like as long as they pay this wage. If we also assume that any given employer is small relative to the size of the labor market, then we don't have to worry about the demand of a single employer driving up wages. This assumption is usually referred to as the employer being a "price taker" in the labor market.
A monopsony occurs when a firm has market power in employing factors of production. Essentially, this means there is one buyer and many sellers (the opposite of a monopoly). An example of a monopsony may occur when there is one major employer and many workers seeking to gain employment; if there is only one main employer of labor, then they have market power in setting wages and choosing how many workers to employ. Furthermore, this concept is important to public policy analysis when analyzing the federal minimum wage. In a monopsony, a minimum wage can therefore increase wages without causing unemployment. Also, the marginal cost of employing one or more workers will be higher than the average cost because to employ one extra worker, the firm has to increase the wages of all workers. In a competitive labor market, the firm would be known as a "price-taker;" if they tried to pay less than the wage, workers would go to other firms willing to pay a higher wage.
rivalrous vs. non rivalrous goods
pure private goods are rivalrous when one person consumes a unit of that good, someone else cannot.
we will say that a good is non-rivalrous when one persons use of the good does not impact another persons use of the good. an alternative way to describe this would be in terms of the marginal cost of additional units consumed.
a non rivalrous good is one where the marginal cost of one or more person consuming the good is zero.
excludable vs. non excludable goods
pure private goods are excludable if it is easy to exclude someone from consuming the good through a charging price.
you can be excluded from seeing a movie if you are not willing to buy a ticket. a ship at sea cannot be excluded from enjoying the benefits of the light created by a lighthouse already located on shore.
pure private goods
pure private goods are where there are no external benefits or costs to the individual market transactions. they are both RIVALROUS AND EXCLUDABLE. markets will provide efficient quantities.
a public good that will be under-supplied by the private sector. is both NON RIVALROUS AND EXCLUDABLE
problem of the commons
public good that is overused. it is both NON EXCLUDABLE and RIVALROUS. problem arises when there is some natural resource of value to society, but no clearly assigned or enforced property rights pertaining to the use of this resource.
pure public goods
good will be undersupplied; is both NON EXCLUDABLE and NON RIVALROUS
the free-rider problem
this is a problem that severely hampers the supply of purely public goods; this refers to situations where parties benefit from the consumption of non-exclusive goods by others and hence have no incentive to pay.
benefits or costs accrued due to a private transaction that will affect the public
MSB vs. MPB
- Positive externalities
- Social benefit is larger than private
- No incentive to produce good at higher quantity for firms => subsidy matches social with private benefit
MSC vs. MPC
- Negative externalities
- private cost is larger than social cost
- no incentive to produce less for firms
- taxes attempt to match social and private cost
the coase theorem
is a legal and economic theory that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution are selected, regardless of how property rights are divided.
pigouvian taxes and subsidies
- Public sector solution to externality
- negative: impose a tax equal to the size of the marginal external cost
- positive: offer a subsidy equal to the marginal external benefits
internalizing an externality
- creating an incentive to attempt to match private benefit/cost with social benefit/cost
- Private solutions: establishing set of rules (homeowners associations, neighborhood watch => voluntary private solution to under provision of security)