class: center, middle, inverse, title-slide # 1.1 — Choosing in Groups ## ECON 410 • Public Economics • Spring 2022 ### Ryan Safner<br> Assistant Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i>safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/publicS22"><i class="fa fa-github fa-fw"></i>ryansafner/publicS22</a><br> <a href="https://publicS22.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i>publicS22.classes.ryansafner.com</a><br> --- class: inverse # Outline ### [Review: The Benefits of Markets](#) ### [When We Must Choose in Groups](#) ### [About This Course](#) --- # About Me .left-column[ .center[  .smallest[ Edinburgh, 2019 ] ] ] .right-column[ .smallest[ - Ph.D (Economics) — George Mason University, 2015 - B.A. (Economics) — University of Connecticut, 2011 - Specializations: - Law and Economics - Austrian Economics - Research interests - modeling innovation & economic growth - political economy & economic history of intellectual property ] ] --- # About Me .left-column[ .center[  .smallest[ My face without a mask, 2021 ] ] ] .right-column[ .smallest[ - Ph.D (Economics) — George Mason University, 2015 - B.A. (Economics) — University of Connecticut, 2011 - Specializations: - Law and Economics - Austrian Economics - Research interests - modeling innovation & economic growth - political economy & economic history of intellectual property ] ] --- # The Reason I am Busy AF Behind the Scenes .center[  ] And why I wear a mask. --- # Public Economics .right-column[ - .hi[How do we choose in groups?] - Going to dinner together - Electing a president of the United States - .hi[“Public choice”]: application of .hi-purple[economic tools] to the study of .hi-purple[politics] - “Non-market decision-making” ] .left-column[ .center[  ] ] --- # Economics as a *Way of Thinking* .pull-left[ - Economics is a .hi[way of thinking] based on a few core ideas: ] --- # Economics as a *Way of Thinking* .pull-left[ - Economics is a .hi[way of thinking] based on a few core ideas: - .hi-purple[People respond to incentives] - Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals ] .pull-right[ .center[  ] ] --- # Economics as a *Way of Thinking* .pull-left[ - Economics is a .hi[way of thinking] based on a few core ideas: - .hi-purple[People respond to incentives] - Money, punishment, taxes and subsidies, risk of injury, reputation, profits, sex, effort, morals - .hi-purple[Environments adjust until they are in equilibrium] - People make adjustments until their choices are optimal given others’ actions ] .pull-right[ .center[   ] ] --- # Optimization and Equilibrium .pull-left[ - If people can *learn* and *change* their behavior, they will always switch to a higher-valued option - If there are no alternatives that are better, people are at an .hi[optimum] - If **everyone** is at an optimum, the system is in .hi[equilibrium] ] .pull-right[ .center[   ] ] --- # The Two Major Models of Economics as a "Science" .pull-left[ ## Optimization - Agents have .hi[objectives] they value - Agents face .hi[constraints] - Make .hi[tradeoffs] to maximize objectives within constraints .center[  ] ] -- .pull-right[ ## Equilibrium - Agents .hi[compete] with others over **scarce** resources - Agents .hi[adjust] behaviors based on prices - .hi[Stable outcomes] when adjustments stop .center[  ] ] --- # Economics Is Broader Than You Think .center[  ] --- class: inverse, center, middle # Review: The Benefits of Markets --- # Economics .pull-left[ - **Economics** begins with .hi[interaction] between *multiple* people - Recognizing .hi-purple[mutual gains from cooperation] - Specialization - Exchange - Team production ] .pull-right[ .center[  ] ] --- # The Origins of Exchange I .pull-left[ - Why do we trade? - .hi[Resources are in the wrong place!] - People have *better* uses of resources than they are currently being used! ] .pull-right[ .center[  ] ] --- # The Origins of Exchange II .pull-left[ - *Why* are resources in the wrong place? - .hi[We have the same stuff but different preferences] ] .pull-right[ .center[   ] ] --- # The Origins of Exchange III .pull-left[ - *Why* are resources in the wrong place? - .hi[We have different stuff and same/different preferences] ] .pull-right[ .center[   ] ] --- # Transaction Costs and Exchange I .pull-left[ - But .hi[Transaction costs] make exchange costly! - .hi-purple[Search costs] - .hi-purple[Bargaining costs] - .hi-purple[Enforcement costs] ] .pull-right[ .center[  ] ] --- # Transaction Costs and Exchange II .pull-left[ - With high transaction costs, resources **cannot** be traded - Resources **cannot** be moved to higher-valued uses - If other people value goods higher than their current owners, resources are **inefficiently** used! ] .pull-right[ .center[  ] ] --- # Social Problems that Markets Solve Well .pull-left[ - **Problem 1**: Resources have multiple uses and are rivalrous - **Problem 2**: Different people have different subjective valuations for uses of resources - **It is inefficient (immoral?) to use a resource in a way that prevents someone else who values it more from using it!** ] .pull-right[ .center[  ] ] --- # Social Problems that Markets Solve Well I .pull-left[ - .hi[Markets] are institutions that facilitate voluntary *impersonal* exchange and reduce transaction costs - **Prices** measure **opportunity cost** of a particular use of a resource ] .pull-right[ .center[  ] ] --- # Social Problems that Markets Solve Well II .pull-left[ - .hi[Property rights] provide a pattern of ownership - .hi[Prices] give us information about how to use scarce resources - .hi[Profits] incentivize production and .hi[Losses] discipline waste ] .pull-right[ .center[  ] ] --- # Prices are Signals .pull-left[ .center[  ] ] .pull-right[ .smallest[ - .hi-purple[Markets are social *processes* that generate information via prices] - .hi-purple[Prices are never "given"], prices .hi-purple[emerge] dynamically from negotiation and market decisions of entrepreneurs and consumers - **Competition**: is a .hi-purple[discovery process] which *discovers* what consumer preferences are and what technologies are lowest cost, and how to allocate resources accordingly ] ] --- # The Social Functions of Prices I .pull-left[ .center[  ] ] .pull-right[ .smaller[ A relatively high price: - .hi-purple[Conveys information]: good is relatively scarce - .hi-purple[Creates incentives for]: - **Buyers**: conserve use of this good, seek substitutes - **Sellers**: produce more of this good - **Entrepreneurs**: find substitutes and innovations to satisfy this unmet need ] ] --- # The Social Functions of Prices II .pull-left[  ] .pull-right[ .smaller[ A relatively low price - .hi-purple[Conveys information]: good is relatively abundant - .hi-purple[Creates incentives for]: - **Buyers**: substitute away from expensive goods towards this good - **Sellers**: Produce less of this good, talents better served elsewhere - **Entrepreneurs**: talents better served elsewhere: find more severe unmet needs ] ] --- class: inverse, center, middle # When We Must Choose in Groups --- # When We Must Choose in Groups I .pull-left[ - Markets allocate resources by **individual choices** between **strangers** - Possibilities of .hi[market failure] - Externalities - Public Goods ] .pull-right[ .center[  ] ] --- # When We Must Choose in Groups II .pull-left[ - Circumstances where people must make a **collective choice** or **know each other** - Justice, fairness, equality - Team production, public goods ] .pull-right[ .center[  ] ] --- # When We Must Choose in Groups III .pull-left[ - Construct a **framework** for markets to operate within - Property rights - Transaction costs - Regulation ] .pull-right[ .center[  ] ] --- # Methodological Individualism .pull-left[ - .hi[Only individual people act] - The individual is the base unit of all economic analysis - *"How will action / choice / policy / institution [X] affect each individual's well-being?"* ] .pull-right[ .center[  ] ] --- # *Groups* Don't Choose .pull-left[ - .hi[“Society”] is not a choosing-agent or an optimization problem - Individuals have **different interests** in their different capacities - Consumers - Producers - Voters - Interest groups - Elected officials - Bureaus ] .pull-right[ .center[  ] ] --- # They Must Choose In a Unique Environment .pull-left[ - No .hi[property rights] - No .hi[prices] - No .hi[profits or losses] ] .pull-right[ .center[  ] ] --- # The "Public Sector" .pull-left[ - Activities by government(s) occupy a large part of the economy - A major function of economists is to analyze and suggest public policy - Positive vs. normative economics ] .pull-right[ .center[  ] ] --- # U.S. Federal Spending as % of GDP <img src="1.1-slides_files/figure-html/unnamed-chunk-2-1.png" width="1008" style="display: block; margin: auto;" /> --- # U.S. Federal Revenues as % of GDP <img src="1.1-slides_files/figure-html/unnamed-chunk-3-1.png" width="1008" style="display: block; margin: auto;" /> --- # U.S. Federal Budget Surplus/Deficit as % of GDP <img src="1.1-slides_files/figure-html/unnamed-chunk-4-1.png" width="1008" style="display: block; margin: auto;" /> --- # U.S. Total Public Debt as % of GDP <img src="1.1-slides_files/figure-html/unnamed-chunk-5-1.png" width="1008" style="display: block; margin: auto;" /> --- # U.S. Federal Spending Breakdown .center[  ] .source[Source: [USAspending.gov](https://www.usaspending.gov/#/explorer/budget_function)] --- # Motivations I .center[  ] --- # Motivations II .center[  ] --- # Motivations III .center[  ] --- # Learning Goals I - Understand the incentives of different participants in a liberal democracy, particularly voters, politicians, bureaucrats, regulators, and special interest groups - Understand the processes by which *actual* public policy gets made by *actual* people - Understand the difference between constitutional-level rules and political rules and the importance of each --- # Learning Goals II - Explain current events and public policies in terms of individuals accomplishing separate political goals through political exchanges - Recognize the analytical and practical similarities and differences between individuals acting in markets and non-market institutions - Understand and explain real world differences in outcomes and in operations between political, cultural, economic, and social institutions in different societies - Overcome the nirvana fallacy --- # Politics Without Romance .pull-left[ .center[  ] ] .pull-right[ - We will make your high school civics teacher proud ] --- # Politics Without Romance .pull-left[ .center[  ] ] .pull-right[ - We will make your high school civics teacher proud and cry ] --- # Politics Without Romance .pull-left[ > What's so great about democracy other than its democratic? - Gordon Tullock > Democracy is the worst form of government, except for all the other forms that have been tried from time to time," - Winston Churchill ] .pull-right[ .center[  ] ] --- class: inverse, center, middle # About This Course --- # Format For the Course .pull-left[ - .hi[This is a 400-level seminar] - A .hi-purple[conversation], not *just* a lecture - Lectures to introduce topic, give background and context - Readings-based discussions ] .pull-right[ .center[  ] ] --- # Assignments <table> <thead> <tr> <th style="text-align:left;"> </th> <th style="text-align:left;"> Assignment </th> <th style="text-align:left;"> Percent </th> </tr> </thead> <tbody> <tr> <td style="text-align:left;"> n </td> <td style="text-align:left;"> Participation (Average) </td> <td style="text-align:left;"> 30% </td> </tr> <tr> <td style="text-align:left;"> 1 </td> <td style="text-align:left;"> Policy Paper </td> <td style="text-align:left;"> 30% </td> </tr> <tr> <td style="text-align:left;"> 1 </td> <td style="text-align:left;"> Take-Home Midterm </td> <td style="text-align:left;"> 20% </td> </tr> <tr> <td style="text-align:left;"> 1 </td> <td style="text-align:left;"> Take-Home Final </td> <td style="text-align:left;"> 20% </td> </tr> </tbody> </table> .center[ See more details at the [assignments page](/assignments) ] --- # Your "Textbooks" .pull-left[ .center[  ] ] .pull-right[ .center[  ] ] --- # Mechanics - Office Hours: MW 3:30-5:00PM - Email: safner@hood.edu - *New* Room Location: Rosenstock 317? - Readings pages on website - .hi-purple[First reading] for next class (.hi[Monday Jan 31]): Coase (1960) - Email 2-3 questions to me before class begins - See more about our discussions on [Assignments Page](/assignments) --- # Course Website .center[  [publicS22.classes.ryansafner.com](http://publicS22.classes.ryansafner.com) ] --- # Logistics .pull-left[ .smallest[ - Office hours: TBD & by appt - Office: 110 Rosenstock - <svg aria-hidden="true" role="img" viewBox="0 0 448 512" style="height:1em;width:0.88em;vertical-align:-0.125em;margin-left:auto;margin-right:auto;font-size:inherit;fill:#5E81AC;overflow:visible;position:relative;"><path d="M94.12 315.1c0 25.9-21.16 47.06-47.06 47.06S0 341 0 315.1c0-25.9 21.16-47.06 47.06-47.06h47.06v47.06zm23.72 0c0-25.9 21.16-47.06 47.06-47.06s47.06 21.16 47.06 47.06v117.84c0 25.9-21.16 47.06-47.06 47.06s-47.06-21.16-47.06-47.06V315.1zm47.06-188.98c-25.9 0-47.06-21.16-47.06-47.06S139 32 164.9 32s47.06 21.16 47.06 47.06v47.06H164.9zm0 23.72c25.9 0 47.06 21.16 47.06 47.06s-21.16 47.06-47.06 47.06H47.06C21.16 243.96 0 222.8 0 196.9s21.16-47.06 47.06-47.06H164.9zm188.98 47.06c0-25.9 21.16-47.06 47.06-47.06 25.9 0 47.06 21.16 47.06 47.06s-21.16 47.06-47.06 47.06h-47.06V196.9zm-23.72 0c0 25.9-21.16 47.06-47.06 47.06-25.9 0-47.06-21.16-47.06-47.06V79.06c0-25.9 21.16-47.06 47.06-47.06 25.9 0 47.06 21.16 47.06 47.06V196.9zM283.1 385.88c25.9 0 47.06 21.16 47.06 47.06 0 25.9-21.16 47.06-47.06 47.06-25.9 0-47.06-21.16-47.06-47.06v-47.06h47.06zm0-23.72c-25.9 0-47.06-21.16-47.06-47.06 0-25.9 21.16-47.06 47.06-47.06h117.84c25.9 0 47.06 21.16 47.06 47.06 0 25.9-21.16 47.06-47.06 47.06H283.1z"/></svg> Slack channel - `#c-econ-410-public` - Covid/Zoom policy, attendance - See the [resources page](http://publicS22.classes.ryansafner.com/resources) for tips for success and more helpful resources ] ] .pull-right[ .center[  ] ] --- # Roadmap for the Semester .center[  ]