How Economists Think and Things They Think About How Economists Think - - PowerPoint PPT Presentation

How Economists Think and Things They Think About

How Economists Think and Things They Think About

 What is Economics?  A Failure of Markets?  Markets Part I: The Good

M k t P t II Th B d

 A Failure of Markets?  Efficiency  Markets Part II: The Bad  Markets Part III: The Ugly  Basic Concepts – A

Crash Course

 Conclusion

f At the conclusion of this lecture, you should be able to:

 Have an appreciation for how economists think about  Have an appreciation for how economists think about,

define, and value socially efficient allocations of resources

 Explain at a basic level why socially efficient outcomes

sometimes fail to occur, and what economic theory suggests can be done in such cases

Economics is the social science that studies how people make choices to allocate scarce resources

 “Most of economics can be summarized in four

words: people respond to incentives. The rest is p p p commentary.” ▪ (Steven E. Landsburg, The Armchair Economist) ( g, )

Scarcity is a fact of life. We can’t attain everything we Scarcity is a fact of life. We can t attain everything we want. H d t i i f l h ti it th t

 Hard to imagine any purposeful human activity that

does not involve scarcity of resources: time, information, labor, capital, natural resources – or all of , , p , the above Scarcity necessitates choice

 Scarcity necessitates choice  If we understand the incentives that influence choices,

we can explain and predict purposeful behavior.

Goal of economics as a social science: Goal of economics as a social science:

 To formulate and test positive statements about how

p the economic world works and to maintain those that are consistent with empirical data and reject h h those that are not

 Positive vs Normative statements  Positive vs. Normative statements

f Scientific Method

 Observation and measurement  Model building

hypothetical explanations

 Model building – hypothetical explanations

▪ Refutable predictions

 Model testing  Model testing ▪ Models surviving empirical validation are kept

Scientific models not evaluated by their realism but by the usefulness of predictions

Economists measure the cost of a good by the minimum amount that someone must give up to get it

 In a world of scarcity, all choices involve an opportunity

cost ▪ Next highest valued alternative foregone

 In economics, “cost” always means opportunity cost  Not the same as the concept of cost in an accounting

Not the same as the concept of cost in an accounting sense

f ( ) f Economists measure the benefit (or value) of a good by the maximum amount that someone is willing to give up to get it it

Economists assume individually rational behavior

 Individuals act to maximize  Individuals act to maximize

Net Benefit = Total Benefit – Total Cost subject to the constraints of scarcity

Social institutions that have evolved to coordinate economic decision making are

 Property rights  Markets

f f ( ) Adam Smith, from The Wealth of Nations (1776) “He generally [does not] intend to promote the public He generally [does not] intend to promote the public interest … he intends only his own gain, and he is … led by an invisible hand to promote an end which was no y p part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it ” really intends to promote it.”

Economist Robert H. Frank Los Angeles Times Op Ed October 18 2011 Los Angeles Times Op‐Ed, October 18, 2011 Charles Darwin the Economist: Natural Selection Explains More About Economics Than Adam Smith's Invisible Hand LA Times Frank Op‐Ed

F k Frank: “In Darwin's theory natural selection favors traits and In Darwin s theory, natural selection favors traits and behaviors that promote individual reproductive

• success. Many of the examples he observed were

y p closely analogous to Smith's account … but Darwin also recognized that individual and group interests often conflict sharply and that, in those cases, individual interests generally trump group interests.”

Male bull elk

Large antlers costly

R l ti i l

Relative signal

Trim all antlers 50%? Trim all antlers 50%?

Win for individuals Win for species

p Agreement will fail

G di Grading on a curve Dubious assumptions: p

 Students receive no benefit from studying aside from

their grade disutility from studying their grade – disutility from studying

 Fixed distribution of ability among students

y g

 Grades only serve as a signal of this distribution to

employers who otherwise cannot distinguish between employers who otherwise cannot distinguish between higher ability students and lesser ability students

0.04 0.045

Grade Distribution With Studying

Hernandez 0.025 0.03 0.035

ncy

Vargas Mora 0.015 0.02

Frequen

30% C 0.005 0.01 15% A 15% F C 20% D 20% B Vázquez Kawa 10 20 30 40 50 60 70 80 90 100

Student Scores

0.04 0.045

Grade Distribution Without Studying

Hernandez 0.025 0.03 0.035

ncy

Vargas Mora 0.015 0.02

Frequen

30% C 0.005 0.01 15% A 15% F C 20% D 20% B Vázquez Kawa 10 20 30 40 50 60 70 80 90 100

Student Scores

We have just seen two examples where We have just seen two examples where Individually Rational Behavior + Competition y p ≠ Socially Opmal Outcome

Some other examples of “markets gone awry”: Some other examples of markets gone awry :

 Self interest and pursuit of profit impose external

p p p costs on society h h

 Free riders attempt to consume what they do not pay

for

 Asymmetric information in markets for loans,

financial assets, insurance, and health care drive up , , p costs for responsible/low risk individuals

Correct interpretation of Smith: Correct interpretation of Smith: Individually Rational Behavior + Competition + Prices y p = Socially Optimal Outcome

 The invisible hand is not just rational self‐interest and

competition but also a system of prices competition, but also a system of prices

 No analog to prices in Darwin’s theory of natural

g p y selection

ff ( f f When we see socially inefficient (wasteful, inferior, lose/lose) outcomes

 Economic theory suggests that the culprit is not a

failure of the principle of a competitive market p p p system, but rather an absence of markets

O iti t On a more positive note … You are running late for the job interview of a lifetime, g j , and somebody with no particular urgency takes your parking spot

 Socially inefficient outcome  You offer the person $100  Lose/lose converted to win/win  Lose/lose converted to win/win

f One of the most important questions in economics:

 Under what conditions are choices guided by  Under what conditions are choices guided by

rational self interest also in the social interest?

 What defines the social interest?

Pareto optimality or Pareto efficiency Pareto optimality or Pareto efficiency

 An outcome is Pareto optimal if it is impossible to make

p p someone better off without making someone else worse off ▪ No unexploited win/win or win/no lose

• pportunities

 Pareto optima cannot be ranked or compared without

invoking normative criteria invoking normative criteria

While Pareto optimality should not be the sole criterion, any allocation we seek should be Pareto

• ptimal

How to decide on a Pareto optimal allocation? p

 Benefit‐Cost Analysis (economic efficiency)

y ( y) ▪ Takes into account how strongly people feel ▪ Estimate how much people are willing to pay for p p g p y alternative outcomes ▪ Leap from individual to social welfare p

 An allocation obtained through benefit‐cost analysis

will be Pareto optimal Market allocation mechanisms mimic benefit cost Market allocation mechanisms mimic benefit‐cost analysis … with the assistance of prices

1st Fundamental Theorem of Welfare Economics 1 Fundamental Theorem of Welfare Economics

 Every competitive market equilibrium is Pareto

y p q

• ptimal

d

l h f lf 2nd Fundamental Theorem of Welfare Economics

 With a redistribution of initial income endowments  With a redistribution of initial income endowments,

every Pareto optimal allocation can be sustained as a competitive market equilibrium p q

The significance of the second theorem is that the issue The significance of the second theorem is that the issue

• f equity in distribution is logically separable from the

issue of efficiency in allocation y

 Society can redistribute incomes in accordance with

h f l l whatever sense of social justice it values

 It can then rely on market forces to assure that those  It can then rely on market forces to assure that those

incomes are spent in a way that achieves the most good for society g y

 I will focus exclusively on how competitive markets  I will focus exclusively on how competitive markets

efficiently allocate scare resources

 It is in this spirit that I will refer to benefit‐cost efficient

• utcomes as being socially efficient

A i l d l P d ti P ibiliti A simple model – Production Possibilities

 Assumed fixed:

▪ Quantities of Resources (e.g. Labor, Capital Equipment, Natural Resources) St t f T h l ▪ State of Technology

 Objective:

j ▪ Allocate resources to maximize a society’s net benefit from two produced goods: Skateboards and Electric Guitars Guitars

17 18 19 20

Production Possibilities

A B

11 12 13 14 15 16

ards C D

5 6 7 8 9 10 11

Skateboa E

1 2 3 4 5

F

1 2 3 4 5

Guitars

No money or trade – or prices – in this economy No money or trade or prices in this economy.

 Pure resource allocation problem

p

 Benevolent dictator: how many units of each good to

l b f produce to maximize net social benefit

 With only two goods costs and benefits are measured  With only two goods, costs and benefits are measured

in terms of the other good

h l b

 Imagine the labor

resources in the economy have the

Grades Type of Person Guitar Making Skateboard Making

economy have the report cards at right:

 How to make the first

Person Making Making 1 A F 2 B D

guitar?

 Use best available

2 B D 3 C C 4 D B

guitar‐making resources first

4 D B 5 F A

17 18 19 20

Production Possibilities

1 G 2 S

A B

11 12 13 14 15 16

ards C D

5 6 7 8 9 10 11

Skateboa 1st Guitar Costs 2 Skateboards E

1 2 3 4 5

F

1 2 3 4 5

Guitars

9 10

en Up)

Marginal Cost

6 7 8

Skateboards Give Must give up 2 Skateboards to get 1st Guitar

3 4 5

t (Measured in S Must give up 2 Skateboards to get 1 Guitar MC

1 2

Marginal Cost

1 2 3 4 5 6

Guitar

17 18 19 20

Production Possibilities

3 S

A B

11 12 13 14 15 16

ards

1 G 3 S

C D

5 6 7 8 9 10 11

Skateboa 2nd Guitar Costs 3 Skateboards E

1 2 3 4 5

F

1 2 3 4 5

Guitars

9 10

en Up)

Marginal Cost

6 7 8

Skateboards Give Must give up 3 Skateboards to get 2nd Guitar

3 4 5

t (Measured in S Must give up 3 Skateboards to get 2 Guitar MC

1 2

Marginal Cost

1 2 3 4 5 6

Guitar

And so on through the fifth guitar And so on, through the fifth guitar …

17 18 19 20

Production Possibilities

A B

11 12 13 14 15 16

ards C D

5 6 7 8 9 10 11

Skateboa 5th Guitar Costs 6 Skateboards E

1 2 3 4 5

1 G 6 S

F

1 2 3 4 5

Guitars

1 G

9 10

en Up)

Marginal Cost

6 7 8

Skateboards Give Must give up 6 Skateboards to get 5th Guitar

3 4 5

t (Measured in S Must give up 6 Skateboards to get 5 Guitar MC

1 2

Marginal Cost

1 2 3 4 5 6

Guitar

f Marginal benefit is the maximum amount that someone is willing to give up one more unit

Marginal Benefit

8 9 10

Given Up)

Marginal Benefit

6 7 8

in Skateboards G Willing to give up 8 Skateboards to get 1st Guitar

3 4 5

efit (Measured

1 2 1 2 3 4 5 6

Marginal Ben MB

1 2 3 4 5 6

Guitar

Marginal Benefit

8 9 10

Given Up)

Marginal Benefit

6 7 8

in Skateboards G Willing to give up 6 Skateboards to get 2nd Guitar

3 4 5

efit (Measured

1 2 1 2 3 4 5 6

Marginal Ben MB

1 2 3 4 5 6

Guitar

And so on through the fifth guitar And so on, through the fifth guitar …

Marginal Benefit

8 9 10

Given Up)

Marginal Benefit

6 7 8

in Skateboards G Willing to give up 0 Skateboards to get 5th Guitar

3 4 5

efit (Measured

1 2 1 2 3 4 5 6

Marginal Ben MB

1 2 3 4 5 6

Guitar

ff f Finding the socially efficient allocation of resources:

 If MB > MC allocate more resources  If MB > MC, allocate more resources  If MB < MC, allocate fewer resources

,

 When MB=MC, resource allocation is socially

efficient

Efficient Allocation of Resources

8 9 10

Measured in

5 6 7

Marginal Cost (M eboards) Marginal Cost (MC)

2 3 4

al Benefit and M Skate

1 2 1 2 3 4 5 6

Margina Marginal Benefit (MB) Guitars

(Total Benefit – Total Cost) is maximized with 3 Guitars. This implies 11 Skateboards.

17 18 19 20

Production Possibilities

A B Start Here

11 12 13 14 15 16

ards C D End Here

5 6 7 8 9 10 11

Skateboa E

1 2 3 4 5

F

1 2 3 4 5

Guitars

Now we introduce prices and decentralized trade in markets …

 The marginal cost curve we derived is a

“least opportunity cost that must be paid” curve. S l M i l S i l C t ▪ Supply = Marginal Social Cost ▪ Minimum sell price curve

 The marginal benefit curve we derived is a

“greatest opportunity cost that would willingly be paid” greatest opportunity cost that would willingly be paid curve. ▪ Demand = Marginal Social Benefit g ▪ Maximum buy price curve

Market Eq ilibri m Achie es Efficient Allocation

1000 1200

Market Equilibrium Achieves Efficient Allocation

800

r Guitar Supply = MSC Max

400 600

Dollars Pe Equilibrium Price Max Buy Price

200 1000 2000 3000 4000 5000 6000

Demand = MSB Min Sell Price

1000 2000 3000 4000 5000 6000

Guitars

f $ In the next slide, notice the essential role of the $400 price of a guitar in guiding every individual toward the socially efficient outcome socially efficient outcome

Market Eq ilibri m Achie es Efficient Allocation

1000 1200

Market Equilibrium Achieves Efficient Allocation

800

r Guitar Supply = MSC Each buyer values Guitar ≥ $400

400 600

Dollars Pe Equilibrium Price Each seller values $400 ≥ Resources Each seller values Resources > $400

200 1000 2000 3000 4000 5000 6000

Demand = MSB

Each buyer values $400 > Guitar Each seller values $400 ≥ Resources

1000 2000 3000 4000 5000 6000

Guitars

Market Eq ilibri m Achie es Efficient Allocation

1000 1200

Market Equilibrium Achieves Efficient Allocation

800

r Guitar Supply = MSC

400 600

Dollars Pe

Consumer Surplus Producer Gains From Trade

200 1000 2000 3000 4000 5000 6000

Demand = MSB

Surplus

1000 2000 3000 4000 5000 6000

Guitars

Market Eq ilibri m Achie es Efficient Allocation

1000 1200

Market Equilibrium Achieves Efficient Allocation

800

r Guitar Supply = MSC

Consumer Surplus

400 600

Dollars Pe

Producer

200 1000 2000 3000 4000 5000 6000

Demand = MSB

Surplus

1000 2000 3000 4000 5000 6000

Guitars

Market Eq ilibri m Achie es Efficient Allocation

1000 1200

Market Equilibrium Achieves Efficient Allocation

800

r Guitar Supply = MSC Excess Supply Drives Price Down

400 600

Dollars Pe Equilibrium Price

200 1000 2000 3000 4000 5000 6000

Demand = MSB Excess Demand Drives Price Up

1000 2000 3000 4000 5000 6000

Guitars

f Summary of this section:

 A properly functioning competitive market allocates  A properly functioning competitive market allocates

resources in a socially optimal manner

 The key to this allocation is a price that accurately

represents marginal benefits and costs to society

f We suspect problems will arise if:

 The price is not permitted to perform its role in  The price is not permitted to perform its role in

allocating resources

 The price does not accurately represent marginal

benefits and costs to society

 The entire market – and hence the price – is simply

missing missing

f Attempting to thwart or bypass market forces through intervention

 Resources still must be allocated but by other methods  Resources still must be allocated , but by other methods  These other methods are generally more costly to society

g y y y

 The cost is measured as lost consumer and producer

surplus ▪ Deadweight Loss

f In the following example, we will study a quota that limits production to 1,000 units

A Prod ction Q ota

1000 1200

A Production Quota

Production Quota at 1,000 Units

800

r Guitar Supply = MSC Deadweight Loss = Lost Gains From Trade

400 600

Dollars Pe

Gains From Trade

200 1000 2000 3000 4000 5000 6000

Demand = MSB

1000 2000 3000 4000 5000 6000

Guitars

In the next example, we will study a price control that prevents the price from rising above $200

 Producers respond to this by only supplying 1,000 units  For the 1,000th unit:

▪ Willingness to pay is $800 g p y ▪ Price explicitly paid is $200

 Notice that a price of $800 paid by buyers would cause

the quantity demanded to be exactly 1,000 units …

A Price Control

1000 1200

A Price Control

Consumer Surplus

800

r Guitar Supply = MSC Deadweight Loss = Lost Gains From Trade Excess Willi Search

400 600

Dollars Pe Willing‐ ness To Pay Costs Add To Dead‐ weight Loss

200 1000 2000 3000 4000 5000 6000

Demand = MSB Price Ceiling at $200 Producer Surplus

1000 2000 3000 4000 5000 6000

Guitars

f Summary of this section:

 Resource allocation is not likely to be socially optimal if  Resource allocation is not likely to be socially optimal if

intervention prevents the price from performing its role in allocating resources g

f Market failure

 Situations where free private markets

without

 Situations where free private markets – without

intervention – yield socially inefficient outcomes

 Not due to a failure of market forces but rather to an

absence of market forces – distorted or missing prices

So far: So far:

 Demand has reflected the MSB  Supply has reflected the MSC

Externalities are benefits and costs that affect a third party to a transaction a transaction

 Private supply does not include external costs to society

pp y y

A pollution example

 Chemical firm and households share a lake  Chemical firm and households share a lake  External costs reduces housing values

g

100 120

cals

An External Cost and Overproduction

80 100

er Ton of Chemic MSC = MC + MEC Marginal External Cost (MEC) Deadweight Loss

40 60

nds of Dollars Pe Supply = MC Marginal External Cost (MEC) Efficient Equilibrium Market Equilibrium

20

Thousan Demand = MSB Market Equilibrium

1000 2000 3000 4000 5000 6000

Chemicals (Tons)

The problem is a missing market

 Nobody owns the lake and the right to either  Nobody owns the lake and the right to either

pollute it or keep it free from pollution

 One way to deal with this is through Pigovian taxes

100 120

cals

Correcting For An External Cost: Pigovian Tax = MEC

80 100

er Ton of Chemic Supply + Tax = MSC Per Unit Tax = Marginal External Cost (MEC)

40 60

nds of Dollars Pe Supply = MC Per Unit Tax Marginal External Cost (MEC) Efficient Equilibrium

20

Thousan Demand = MSB

1000 2000 3000 4000 5000 6000

Chemicals (Tons)

( ) Coase Theorem (Ronald Coase, 1961)

 If transactions costs are low assignment of property  If transactions costs are low, assignment of property

rights results in a socially efficient allocation

 In terms of achieving the socially efficient allocation

• f resources, it doesn’t matter to whom the

property rights are assigned!

100 120

cals

Residents Own The Lake

80 100

er Ton of Chemic Supply Including Payment

• f Damages = MSC

Firm Pays Damages = MEC

40 60

nds of Dollars Pe Supply = MC Firm Pays Damages MEC Efficient Equilibrium

20

Thousan Demand = MSB

1000 2000 3000 4000 5000 6000

Chemicals (Tons)

100 120

cals

Chemical Factory Owns The Lake

Supply Including Opportunity

80 100

er Ton of Chemic Supply Including Opportunity Cost of Reduced Rents = MSC Opportunity Cost of Reduced Rents= MEC

40 60

nds of Dollars Pe Supply = MC Opportunity Cost of Reduced Rents MEC Efficient Equilibrium

20

Thousan Demand = MSB

1000 2000 3000 4000 5000 6000

Chemicals (Tons)

Marketable Permits to pollute

 Create a market for the right to pollute  Create a market for the right to pollute

Market determined price of a marketable permit $30 l i di b d 2000 Total permits disbursed 2000 Firm A's MC $20 Firm B's MC $40 P i t f h i l $60 Price per ton of chemicals $60 Firm A buys 1 permit from firm B and increases its production by 1 ton Firm B sells 1 permit to firm A and decreases its production by 1 ton Firm A Firm B

Revenue gain from selling 1 more ton of chemicals

+$60

Revenue loss from selling 1 less ton of chemicals

‐$60

1 more ton of chemicals 1 less ton of chemicals MC paid by producing 1 more ton of chemicals

‐$20

MC saved by producing 1 less ton of chemicals

+$40

Price paid for permit

‐$30

Price received for permit

+$30 +$10 +$10

A public good is

Nonrival in consumption Nonrival in consumption

▪More than one person can consume simultaneously simultaneously

Nonexcludable

▪Free rider problem

24

A Public Good: Nonrival and Nonexcludable

Deadweight Loss

16 20

eet Light MSB = Vertical Sum of Alice’s and Bill’s Demands Deadweight Loss

8 12

Dollars Per Stre Supply = MSC Efficient Equilibrium

4

Alice’s Demand = Bill’s Demand

1 2 3 4 5 6

Street Lights Private Market Equilibrium Quantity With Free Rider Problem

f Asymmetric Information

 A missing market for information  A missing market for information  The market for lemons (George Ackerloff, 1970)

( g , )

60

The Market For Good Used Cars

Supply

40 50

Per Good Car

20 30

sands of Dollars Efficient Equilibrium

10

Thous Demand

2000 4000 6000 8000

Good cars

60

The Market For Lemons

40 50

Per Lemon S l

20 30

sands of Dollars Supply

10

Thous Efficient Equilibrium Demand

1000 2000 3000 4000 5000 6000 7000 8000

Lemons

f f f

 A problem of asymmetric information arises if

buyers cannot tell good cars from lemons

 The seller knows, but the buyer does not. After the

sale, the buyer knows, but it is too late , y ,

 Pooling equilibrium – both types of used cars are

combined in one market

 Price reflects probability of buying a good car or a

lemon

 The pool of used cars contains an inefficiently high  The pool of used cars contains an inefficiently high

proportion of lemons – the good cars are under supplied and the lemons are over supplied pp pp

60

The Market For All Used Cars – Pooling Equilibrium

40 50

rs Per Car

20 30

usands of Dolla Supply

10

Tho Demand Market Equilibrium

2000 4000 6000 8000

All Cars

60

The Market For Good Cars In Pooling Equilibrium

Supply

40 50

Per Good Car Deadweight Loss

20 30

sands of Dollars Efficient Equilibrium

10

Thous Demand Equilibrium For Good Cars at Pooling Equilibrium Price

2000 4000 6000 8000

Good cars

60

The Market For Lemons In Pooling Equilibrium

40 50

Per Lemon S l

20 30

sands of Dollars Supply Equilibrium For Lemons at Pooling Equilibrium Price

10

Thous Efficient Equilibrium Demand Deadweight Loss

1000 2000 3000 4000 5000 6000 7000 8000

Lemons

Solution to the lemon problem: a signaling mechanism Solution to the lemon problem: a signaling mechanism

 Related examples where lower quality products or assets

p q y p are overrepresented ▪ Insurance ▪ Loans ▪ Financial Assets

Last example: The Prisoners’ Dilemma – game theory Last example: The Prisoners Dilemma game theory

 Strategies that are individually optimal lead to

g y p socially inefficient outcomes h l b ( h h ) Nash Equilibrium (John Nash, 1950)

 Each player chooses his/her best strategy given the  Each player chooses his/her best strategy given the

• ther player’s strategy

Remember these folks? Remember these folks?

0.04 0.045

Grade Distribution With Studying

Hernandez 0.025 0.03 0.035

ncy

Vargas Mora 0.015 0.02

Frequen

30% C 0.005 0.01 15% A 15% F C 20% D 20% B Vázquez Kawa 10 20 30 40 50 60 70 80 90 100

Student Scores

The Nash equilibrium is socially inefficient The Nash equilibrium is socially inefficient

 Given Kawa’s strategy to study, the others choose to

t d study

 Given that the others choose to study, Kawa chooses

y, to study Similarly for each of the others

 Similarly for each of the others  Nobody has any incentive to deviate from a strategy

y y gy that delivers a socially inefficient outcome

The no‐studying agreement fails because of a lack of The no studying agreement fails because of a lack of enforcement

 With a one‐time game, the missing market is one for

reciprocation: punishment or reward

 With repeated plays of the game, the agreement can

be enforced through punishment and reward for be enforced through punishment and reward for past behavior

S f thi ti Summary of this section:

 Resource allocation is not likely to be socially optimal if

y y p entire markets – and hence prices – are missing When a socially inefficient outcome arises an economist

 When a socially inefficient outcome arises, an economist

looks for missing markets and hence a restoration of missing markets in an attempt to get the outcome to be g p g more efficient

 Some people take the ideas we have explored and

champion free market competition unquestioningly, always and in all circumstances always, and in all circumstances.

 Others take away from these ideas a fundamental

y distrust of free markets and instinctively turn instead to regulation and intervention as a first, rather than a last, resort.

 What I take away from these ideas is that, when

y , markets function properly, which is a great deal of the time, they are hard to beat as a method of resource allocation to achieve benefits for society.

 When individual markets fail, it is not the principle of

, p p free markets that has failed.

 The same rational pursuit of self interest that leads

to efficient outcomes can also lead to inefficient

• utcomes in the absence of prices The problem isn’t
• utcomes in the absence of prices. The problem isn’t

self interest per se, but rather a lack of markets and prices to channel that self interest for the social prices to channel that self interest for the social good.

f f f

 Often the least costly method of fixing the problem

is to identify missing markets or missing property rights and implement policies that mimic rather rights and implement policies that mimic, rather than replace, market mechanisms.

f

 What I hope you take away from this lecture is the

beginning of an appreciation of how economists think, the kinds of things they think about and a willingness the kinds of things they think about, and a willingness to critically analyze the arguments and examples I have presented – and other arguments – in order to p g arrive at your own conclusions.