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Unformatted text preview: PADP 6950: Founda1ons of Policy Analysis Introduc)on Angela Fer1g, PhD Gree1ngs Pair up Talk for 5 minutes Introduce your partner 1 3 hours! How will we survive? Snacks sign up sheet Only 1-1.5 hour of lecture This means you have to read before class. Last half of class will involve "prac1ce": Games/experiments Prac1ce problems to work in groups Extemporaneous policy analyses Etc. Course Mechanics No prerequisites: no economic background expected Required Text: Varian Grading: 2 exams: midterm and final (30% each) weekly homework sets (10%) work in groups, turn in separate work Explain a puzzle (10%) Policy memo (20%) 2 papers Office hours: Fri 10-noon, or by appt Website: hdp://hogwarts.spia.uga.edu/~afer1g/ founda1ons.html 2 What is economics? Economics is the study of how people allocate scarce resources among alterna1ve uses Scarce resources = income, 1me, produc1ve resources like labor and capital Involves trade-offs Microeconomics is the study of households and firms (or industries) and how they interact in markets Macro is the study of economy-wide phenomena Why study economics? Economics is a fundamental part of our lives because we make economic decisions all of the 1me: Which goods to buy, whether and where to go to college, which job to take, how to get to work, where to live, where to send the kids to school, etc. Economics is a framework for understanding the decisions that people make: It forces you to appeal to a systema1c set of principles in making statements or drawing conclusions about how people behave It fosters a more scien1fic way of thinking about how the world works which can help in making predic1ons 3 How is economics relevant to public policy? Public policies are ojen aimed at affec1ng the decisions of consumers or firms (taxa1on, unemployment benefits, food stamps, price regula1on, pollu1on emissions standards, etc.). In order to design effec5ve policies, the analyst needs to know how consumers and firms will respond to the various op1ons Also, public managers must ojen make economic decisions (because they have scarce resources at their disposal), so economics can provide a guiding framework for their decisions Let's go through an example: The Market for Apartments How is the price for apartments determined? And how is it determined who gets to live in each apartment? First, we need a model Models separate economists from most other social scien1sts Must simplify world using assump1ons Map doesn't need every stoplight and building But some1mes useful to have direc1on of one-ways, exit numbers, etc., depending on what you are trying to do 4 Model assump1ons Consider only apartments in a 1 mile radius of campus; assume all apartments are iden1cal If a poten1al renter can't afford an apartment in the 1 mile radius, they will rent an apartment further away (won't be homeless) All possible renters are iden1cal except that they have different rents they are
willing to pay; they will try to get the closest apartment they can afford All landlords are iden1cal, independent, and want to rent their apartments at the highest price they can get In the short-run, the supply of apartments is fixed (in the long-run, new construc1on can increase the supply) Everyone is aware of all of the prices being charged Demand Only one person willing to pay $500 (highest) If price is >$500, no one will get an apartment If price is $500, only one person will get an apartment One person willing to pay $490 max If price is $481-490, two people will get an apartment Two people willing to pay $480 max, etc. If price is $471-480, four people will get an apartment Demand curve draws out the quan1ty demanded at a given price Slopes down 5 Demand curve Supply curve In this simple model, there is a fixed number of apartments, so the supply curve is a ver1cal line 6 Equilibrium Graph Equilibrium Prices adjust un1l the amount that people demand of something is equal to the amount that is supplied. Tenants will put in applica1ons for all apartments with rents below their reserva1on rent (max WTP) If a landlord charges a low price (pL<p*), they will have many tenant applica1ons to go through; the landlord will raise her price un1l they can't raise it anymore (or lose all applicants) If a landlord charges a high price (pH>p*), they will have no tenant applica1ons; the landlord will lower her price un1l there is a tenant willing to pay that price If renter has WTP>P*, and 2 iden1cal apartments are available (one at P* and one at P>P*), choose one at P* 7 Back to original ques1ons How is the price for apartments determined? Where supply = demand p* How is it determined who gets to live in each apartment? Rent apartment in 1 mi radius if reserva1on price is above p* Rent further away if reserva1on price is below p* If reserva1on price = p*, indifferent Compara1ve Sta1cs Compare two equilibria without worrying about how the market moved from one to the other What happens if there is new construc1on? Supply shijs out Price falls 8 Compara1ve Sta1cs 2 What happens to price if developer decides to turn several apartments into condos? Supply shijs back Demand shijs back (some renters may want to buy instead) Price change depends on rela1ve shijs Compara1ve Sta1cs 3 What happens to price if the city council charges landlords a tax of $50/year on each apartment? No change in price: Landlord already charging highest price she can get Tax doesn't affect supply of apartments in short-run (important assump1on) Tax doesn't affect demand for apartments Landlord cannot pass the tax along to renters 9 Other Types of Markets Perfect compe11on (discussed up un1l now) Independent landlords compete for renters All apartments have same price Discrimina1ng monopolist One landlord owns all apartments Charge each renter a different price (their reserva1on price) Same people get apartments, but most pay more Other Types of Markets Ordinary monopolist One landlord owns all apartments Assume she can only charge one price Landlord chooses price to maximize profit (revenue in this case assuming no costs) Fewer apartments will be rented and price will be higher compared to compe11on 10 Other Types of Markets Rent Control Government restricts price to pmax<p* There will be excess demand (more people who want to rent than apartments) Who will get the apartments? Need to expand simple model; probably will depend on who knows who, who has more 1me to search, etc. Comparing the outcomes Most profit for landlords? Least profit for landlords? Highest price to renters? Cheapest price to renters? Most consumer surplus (WTP-p) to renters? Discrimina1ng Monopolist Rent Control Discrimina1ng Monopolist Rent Control Perfect Compe11on 11 Welfare Posi1ve vs. Norma1ve Analysis Posi5ve = describe how the world is E.g. rent control distorts the distribu1on of apartments What the scien1st studies Norma5ve = argue how the world should be E.g. the govt should remove all rent control laws What the policy advisor would say Pareto Efficiency One way to compare outcomes Pareto improvement = a way to make some people beder off without making anybody else worse off Pareto efficient = reached the point where all Pareto improvements have been made, no more Pareto improvements are possible 12 Pareto improvement example Suppose all apartments regardless of distance from campus were randomly assigned and rent is $200 regardless of loca1on A, who has WTP $400 for a close apartment, got an apartment far away (that he values at $200) B, who has only WTP $200 and didn't care about distance, got a close apartment There is room for Pareto improvement here: A and B swap apartments and A gives B $100 A pays $200 to the landlord and $100 to B = $300 for an apartment he values at $400 B pays $200 to the landlord and gets $100 from B = $100 for an apartment he values at $200 Pareto efficient? Compe11on? Yes no Pareto improving trades possible Discrimina1ng Monopolist? Yes no Pareto improving trades possible Ordinary Monopolist? No some apartments are empty: Landlord could offer discount price (price discriminate) for empty apartments Rent Control? No those who value the close apartments a lot may be without an apartment so Pareto improving trades are possible 13 ...
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This note was uploaded on 01/18/2012 for the course PADP 6950 taught by Professor Fergi during the Spring '11 term at University of Georgia Athens.
- Spring '11