Announcements
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Problem set due this Thursday *in class* or electronically by email
before class.
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Midterm exam is a week from Thursday. Study guide and practice
midterm are posted.
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Midterm covers material through economic regulation.
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Coffee hour next week (optional!!)
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Mid-semester survey posted on Friday

Outline
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Finish our discussion of DUM1.0
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Summarize results from our in-class experiment
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Conclude our theoretical overview of market failures
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Theory of Economic Regulation
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Application 1: Regulating a natural monopoly
Readings:
( VHV)
Economics of Regulation and Antitrust
Chapters 10, 11
. Available as a
free online resource through the UCB library (using a UCB IP address):
.

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The conventional Civic (option I) costs $16,000 and gets 30 miles per
gallon.
Simple DUM 1.0 application

Simple DUM 1.0 application
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The Civic Hybrid (option 2) costs $20,000 gets 45 miles per gallon.

Simple DUM 1.0 application
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Assume gas prices of $3/gallon.
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Assume 15,000 miles per year
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Assume you will sell the hybrid Honda Civic for $1000 at the end of 5 years.
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Assume you will sell the conventionaI Honda Civic for $600 at the end of 5
years.
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Assume a nominal discount rate of 10 percent.
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Assume all costs are in nominal terms (discount nominal future values with
a nominal interest rate).
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Assume we pay cash for the car in time period 0 and incur operating (fuel
costs) in time periods (years) 1 through 5.
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Civic gets 30 mpg. Hybrid gets 45 mpg.

Policy implications?•Suppose that the government wants to incentivize the hybrid…(whymight it want to do this?)

How does this compare to how you actually make thesetrade offs between present/future costs/benefits?

DUM 1.0

DUM 1.0
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DUM 1.0 is sometimes portrayed as rational choice behavior,
particularly by non-economists.
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It is a foundation of cost benefit analysis and routinely incorporated
into policy design, implementation, evaluation.
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BUT it does not perform well in explaining the intertemporal
decisions people actually make!

Beyond DUM 1.0
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Economists and psychologists use this model as a benchmark to
identify ways in which people conformed to or deviated from this
simple framework.