P U B L I C P O L I C Y F O R FA I R N E S S & E F F I C I E - PowerPoint PPT Presentation

P U B L I C P O L I C Y F O R FA I R N E S S & E F F I C I E N C Y I I MPA 612: Economy, Society, and Public Policy January 30, 2019 Fill out your reading report on Learning Suite

P L A N F O R T O D A Y Fairness Pulling policy levers Economic models Measuring policy outcomes

FA I R N E S S

I S P A R E T O T H E B E S T S T A N D A R D ?

I S P A R E T O T H E B E S T S T A N D A R D ? There can be more than one Pareto-efficient allocation (or none!) There are no rankings No consideration of power No consideration of fairness

E F F I C I E N C Y V S . E Q U I T Y Efficiency The most economic pie is consumed Equity / Fairness / Justice It matters who consumes how much of the pie

F A I R N E S S M A T T E R S

T H E U LT I M A T U M G A M E Most rational, most efficient outcome is to accept any offer But this doesn’t happen!

T H E U LT I M A T U M G A M E

W H A T C O U N T S A S F A I R ? Substantive fairness What the allocation looks like Procedural fairness How the allocation got there Veil of ignorance fairness

H O W D O W E D E C I D E W H A T ’ S F A I R ? Social norms

“But let judgment run down as waters, and righteousness as a mighty stream.” (Amos 5:24, KJV) “Learn to do good; seek justice, rescue the oppressed, defend the orphan, plead for the widow.” (Isaiah 1:17, NRSV) “This was the guilt of your sister Sodom: she and her daughters had pride, excess of food, and prosperous ease, but did not aid the poor and needy.” (Ezekiel 16:49, NRSV)

L U C K , N O R M S , A N D T A X E S

L U C K , N O R M S , A N D T A X E S

Is international Is international trade efficient? trade just/fair?

P U L L I N G P O L I C Y L E V E R S

T R A G E D Y O F T H E C O M M O N S Farmer 2 Use water normally Double water use Use Farmer 1 6, 6 2, 8 water normally Double 8, 2 3, 3 water use

T R A G E D Y O F T H E C O M M O N S 50% tax on Farmer 2 doubled use Use water normally Double water use Use Farmer 1 6, 6 2, 4 water normally Double 4, 2 1.5, 1.5 water use

I S T H A T T A X F A I R ? Procedurally? Substantively? Rawlsianly?

C H A N G E S I N T A X E S Firm owner Pay normal tax Hire lawyers for loopholes Current policy Government Moderate 100, 500 85, 495 tax rate High 150, 450 90, 490 tax rate

What happens if taxes go up?

N A S H E S M A T T E R Government tries to get to (High taxes, Pay normal rate) Firms hire lawyers New outcome is worse for everyone Policies must be a Nash equilibrium

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ϵ = ∞ = Perfectly elastic Any change in price Identical goods moves quantity to 0 Two vending machines ϵ > 1 = Elastic Changes in price change Goods with substitutes the quantity a lot Diet Coke ϵ = 1 = Unit elastic Changes in price change the quantity the same ϵ < 1 = Inelastic Changes in price change Goods with few substitutes the quantity a little AIDS medicine ϵ = 0 = Perfectly inelastic Changes in price do Survival goods nothing to the quantity Water in the desert

ϵ , T A X E S , & P R E F E R E N C E S Taxing things changes their prices Changing prices changes quantities demanded Taxing elastic goods will make quantities go down a lot and decrease tax revenues Taxing inelastic goods will make quantities go down slightly and not hurt revenues

If P ↑ by 10%, Q ↓ … 8.3% 2.7% 19.72%

G E N E R A L T A X G U I D A N C E Tax inelastic products unless you’re tying to change consumption Soda? Cigarettes? Alcohol? Property? Those who can afford to avoid taxes will try to avoid them

H O W T O A V O I D U N I N T E N E D C O N S E Q U E N C E S Policy change shouldn’t change preferences in bad ways Israeli daycare NCLB testing ACA part-time hours Policies must be a Nash equilibrium

E C O N O M I C M O D E L S

Y T H O ? Why the h*ck am I making you think about game theory? The world is never this simple! The predictions are obvious!

Models purposefully shrink the world so we can measure and predict things in it

No economic model can be a perfect description of reality. But the very process of constructing, testing and revising models, forces economists and policymakers to tighten their views about how an economy works. This in turn promotes scientific debate over what drives economic behavior and what should (or should not) be done to deal with market failures. Sam Ouliaris, IMF

No economic model can be a perfect description of reality. But the very process of constructing, testing and revising models, forces economists and policymakers to tighten their views about how an economy works. This in turn promotes anything scientific debate over what drives economic behavior and what should (or should not) be done to deal with market failures. Sam Ouliaris, IMF

G O O D M O D E L S Clear / parsimonious Identify important relationships Make good predictions Improve communication Useful

M E A S U R I N G P O L I C Y O U TC O M E S

G O D W I N ’ S L A W F O R S T A T I S T I C S Correlation does not imply causation Except when it does Even if it doesn’t, this phrase is useless and kills discussion