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26 Cards in this Set

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A young senatorial staff member was asked to hire a policy analysis firm to provide her senator with timely analysis of critical issues on an as-needed basis. The staff member hired a group that was known for its one-sided analyses. Why would this be a problem for the senator (since she correctly selected the senator’s own side)?
Cherry picking

Stakeholders are wider than those who voted for you.

Legislators need the truth --- if they want to cherry pick, they will have to suffer the consequences. What did they know and when did they know it…
Why do we need to understand market failures if we are going to do policy analyses?
We need an answer to the question “when should government do something.” Conservatives, liberals and libertarians all know that government can’t and shouldn’t do everything. We need a way to say when it needs to intervene. Economics provides that answer by showing that the invisible hand works well to allocate resources efficiently when the conditions for perfect competition exists. When those conditions are violated, then the market doesn’t work.
When is privatization a good idea, and when might it not be a good idea (hint: think about markets ...)
Privatization works when
markets work. Why might it be a bad idea to subcontract all of our military needs to security firms like Blackwater?

Free rider

Monopoly power

Externalities
Why won’t the market work to produce enough public goods?
Public goods can be used without using them up, and their use by those who do not pay for them cannot be realistically prevented.

Can’t be traded.

Free rider
What is Pareto Optimality and why do we care?
Pareto optimality is the condition where no further gains to trade can be made without making someone worse off. It is a prerequisite for reaching the most efficient allocation of goods and services. We care because we think that it is a good thing that we reach the most efficient allocation of resources.

Is government intervention completely covered by market failure? No --- not in the game…
Why do we need to make a decision on who has standing in our policy analysis?
Cost/benefit won’t be calculated for those who have no standing
Unknown to consumers, a firm sells toys coated with a paint that is cheap, but contains lead. (There are 2 here.)
Unknown to consumers, a firm sells toys coated with a paint that is cheap, but contains lead. (There are 2 here.) INFO, EXT
Why is education thought to be a public good (use the formal definition of “public good.”)
Education is a good that isn’t used up by one person who uses it.

It is hard to exclude people from taking advantage if the benefits of having an educated nation.
A US company that primarily sells its products in the US but has significant overseas operations treats its workers so badly that the conditions resemble slavery (including the use of child labor, seriously unsafe working conditions, wages significantly less than the normal wage for a low-skilled worker in that country --- when there are jobs…, etc.). The company has become the US face in this foreign county. The country has a natural resource the US needs and the government in that country has always been friendly to the US, even though countries other than the US are interested in the resource.
A US company that primarily sells its products in the US but has significant overseas operations treats its workers so badly EXT
An increasing number of people, including whole families, are becoming homeless.
An increasing number of people, including whole families, are becoming homeless. EXT
Traffic congestion is increasing in the Triangle area.
Traffic congestion is increasing in the Triangle area. EXT
A drug company can set the price of a critically important drug above the price dictated by perfect competition.
A drug company can set the price of a critically important drug above the price dictated by perfect competition. PRICE
Two Eastern US States have both passed laws that make lottery purchases difficult for citizens from the “other” state. These laws have caused lottery purchases to drop in both states.
Two Eastern US States have both passed laws that make lottery purchases difficult for citizens from the “other” state. These laws have caused lottery purchases to drop in both states. PRISONER
The sub-prime lending problems cannot be easily fixed because there were hidden-in-the-fine-print significant prepayment penalties (making refinancing all but impossible) and unsuspecting hedge fund groups bought these mortgages hidden in large bundles of mortgages from the primary lenders.
The sub-prime lending problems cannot be easily fixed because there were hidden-in-the-fine-print significant prepayment penalties (making refinancing all but impossible) and unsuspecting hedge fund groups bought these mortgages hidden in large bundles of mortgages from the primary lenders. EXT
The re-segregation of schools is seen to be a problem even if the financial resources could be equalized between the schools. Re-segregation has been argued to cause the “overhearer” problem, which materially affects minority student performance. There are other problems as well.
The re-segregation of schools is seen to be a problem even if the financial resources could be equalized between the schools. Re-segregation has been argued to cause the “overhearer” problem, which materially affects minority student performance. There are other problems as well. Pub G, EXT
In some towns in South Africa, those with financial resources have to make their cars and homes into tanks and homes into fortresses. Even then, the violent crimes in homes and in cars take many lives.
In some towns in South Africa, those with financial resources have to make their cars and homes into tanks and homes into fortresses. Even then, the violent crimes in homes and in cars take many lives.
EXT
Some argue that our involvement in the United Nations and other international organizations is an invitation to subvert our nation’s sovereignty. What market failure would you invoke to argue that the view doesn’t show the whole picture?
Some argue that our involvement in the United Nations and other international organizations is an invitation to subvert our nation’s sovereignty. What market failure would you invoke to argue that the view doesn’t show the whole picture? EXT
What is “sunk cost” and why is it not a good idea to take it into account when we make a decision? How does marginal thinking relate to this question?
Sunk cost is the cost we have already paid for something. It should not affect our decision to make the next purchase (the airplane ticket example).
Explain why lack of complete information cramps the invisible hand.
The invisible hand works if people can choose exactly the bundle of goods that best satisfies their preferences given their budget. If they don’t know enough about a good to know whether or not it satisfies their preferences, they will not be able to make the correct choices.
Why is it a good idea to completely describe the discomforts surrounding an issue before choosing a subset of those discomforts to attack with a cause we call a “problem”?
Unhooking our mind

Going back to the well

Perspective
Why should we argue against other approaches to our stated problem?
If we do not understand the other approaches, we will not be able to argue against them. Forcing and argument forces understanding

It helps us understand the things our approach is liable to do well
Why should a government consider the elasticity of a good it is about to tax?
Elasticity is a measure of how much a quantity changes in response to a change in price. If the government needs to make x amount of revenue, it needs to make sure that the sales of the taxed doesn’t tank.
How can taxes distort the economic picture so that we can no longer arrive at the “bliss point?” When might taxation NOT distort the market?
Any tax not designed to redress a market failure will move us from the bliss point by incurring deadweight loss.

If a tax IS designed to redress a market failure, it can actually remove a deadweight loss.
Why is the assignment of property rights so important in avoiding market failures?
Only goods that can be traded enter into the perfectly efficient allocation scheme of Adam Smith’s market. A good that has no owner can’t be traded.
Does the invisible hand work for everyone? Who is left out?
People who can’t afford to purchase the things they need are left out.
The economic theory we have been dealing with assumes that we are “risk neutral” --- that is, we are not allergic to taking a risk because it is a risk. We just calculate the risk and the reward and make a decision. In Munger’s Dartmouth ticket example, did the student’s actually get the answer wrong or does that example say something about our real attitude toward risk?
We tend to be risk-averse. A loss to us is “worth” more than a gain. I will only accept a bet that pays me more than fairly is I am giving something up.