Micro

Tuesday, January 18, 2011 10:55 AM

1/18/11 Introduction: Micro is the study of people assuming people are rational The study of allocation of scarce resources - Rich and poor countries are faced with scarcity - The action of choice is based in scarcity Choice is freedom - Time is a part of scarcity Based on time preferences Micro Economics: The science of choice- the science that explains the choices that we make how those choices change as we cope with scarcity
5 big economic questions: What, who when, where, for whom? Price theory All answers are provided with prices Greed is not the only thing that drives private interest, it can be compassion and love for others or other various things.

Comparative vs. Absolute advantage Production: land, capitol, & labor Opportunity Cost: A choice is a trade off- we give up something to get something to get something else- and the highest valued alternative we give up is the opportunity cost of the activity chosen . Value is highly subjective - Value is in the eye of the beholder
Adam Smith: Value is objectiveLabor Value Theory, the value is equal to the amount of labor put into the thing -Dangers to this theory: There is no capital Labor is the only source of wealth This leads to the idea: why do we need capitalists? This theory is not true because values are subjective to the consumer (Yuri would not purchase a projector for a dollar, but someone else would buy it for more.) There are different value interpretations between people

Positive and Normative Economics: Economists attempt to discover an exploration for how economic systems work. Economists distinguish between Positive Statements(What is) and Normative Statement (What aught to be) Steps: to Economic Science - Observation and measurement - Model Building - Testing HW: Read Ch.1 1/20/10 Key Assumptions to Economic Science People are self interested

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Key Assumptions to Economic Science People are self interested People are rational People have unlimited desires but limited resources Robinson Crusoe has a set of needs on the isolated island however the more people you interact with the more resources you need to satisfy the unlimited possibilities of desires/needs Most human behavior is motivated by self interest More than greed, it can take different forms It encompasses anything that makes a person happy Rational People Consider consequences of their actions Take action to promote self interest Respond to incentives
Daniel Kaheman and Vernon Smith Their views of human activity was new Vernon - Did experimental economics - Experimented on his students and came up with general conclusions

Experimental Economics The study of economics is moving from logic positivism and field observation one of experimentation under controlled conditions One of the problems with substantial institutional change is that modification and irreversibility makes the process slow, cautions and costly to society Experimental economics yields a formal and replicable system for analysis alternative market structures before they are actually implemented Historical Market experiments Game experiments Individual choice experiments
Market Experiments - Chamberlin's Theory of Monopolistic Competition - Smith 1962; Double auction experiments Benefits of Experimental Economics - Replicable - Control - If theory doesnt work under ideal conditions in the lab, it will certainly not work in reality - Communication between theorists and experimentalists (particularly in game theory experiments) - Can be used in litigation to shift burden of proof Ex. Case with the dead roof man who died from a disease Opportunity costs is uncertain Problems: - Non-realists - Insufficient incentives - Subjects not sophisticated enough Indirect effects: Incentives to rational people can create indirect effects of government policies Example: Policy: pharmaceutical companies have to sell lifesaving drugs at lower prices to reduce cost of medical care Indirect effect: pharmaceutical companies spend less money on research and development of new drugs

Production Possibility frontier PPF is a line that shows combinations of goods a country can make using all of its productive resources It shows tradeoffs a country has to face By moving from one point to another on PPF, a country has to give up production of one

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 good for another Million Computers 10

12 Million televisions

Inside PPF Not using all resouces Can rpoduce more of both Buchanan-Everything Else Outside PPF Innovation
Increasing Wealth Markets Voluntary exchange of goods services money and resources Creates wealth by providing incentives for trade and specialization

Economic Models Simple theoretical description that capture the essentials of how the economy works - Used because the "real world" is too complicated to describe in detail - Models tend to be "unrealistic" but useful While they fail to show every detail (such as houses on a map) they provided enough structure to solve the problem (such as how a map provides you with a way to solve how to drive to a new location) 1-25-11 Property rights What is Economic Freedom? Personal Choice Voluntary exchange Protection of Persons and Property Socialism Two types: Russia communism -no property rights, everything is nationalized and owned by the government . Its not even economic, its more about management. People only work because they are told to work not because they want to. Nazi Socialism Normally preserves private ownership or markets, prices, wages, and interests rates. There are however no longer entrepreneurs but only shop managers. The owners of businesses were more like shop managers for the government. They had to answer to the government at all times. Socialism is mixed with nationalism. Because of the lack of incentives they had to murder people to install fear in the hearts of the people to work Private Property Economic freedom leads to economic growth and higher per capita income Economic freedoms and property rights is the source of freedom Restrictions on property rights: They should be well defined

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In as much as we do not destruct others property rights 46% of people in prison are on charges of drugs [economics of crime and punishment- Gary Becker(paper***)] - Economics of a prohibited good leads to violence Say someone sells you chalk instead of cocain you cant call the police to enforce them to get your money back so you have to go with guns and enforce it yourself Chapter 3 The Consumer Theory How consumers make choices under income constraints Market= where supply meets demand, where buyers and sellers are exchanging - They can be a place; walmart, world trade center, monster.com, etc. Consumer theory is a mirror for production theory Utility: Idea that utility is something we are looking for in consumption The value a consumer places on a unity of good or service depends on the pleasure Consumers are utility maximizers Consumers prefer more of a good thing than less of it Diminishing marginal Utility: as more and more of a good is consumed by a consumer, ceteris paribus, beyond a certain point the utility of each additional unit starts to fall
Transfer Utility into money: Money becomes our comparative measure of utility because we use it for trade.

"Trickle Down" Economics - Utility can trickle down in society - It starts with human desire and trickles down to society - Ex. Consumers endorce what is to be sold, if people buy product from china they endorce production in china
Marginal Utility: The utility a consumer derives from the last unit of a consumer good she or he consumes during a consumption period. (coke in airport vs. tom thumb)

Total Utility: Utility a consumer derives from the The aggregate level of satisfaction or fulfillment that a consumer receives through the consumption of a specific good or service.

Total utility

Marginal Utility

Hamburgers vs. hotdogs

Marginal UtilityD/ Price D > MUH/PH

One dollar's worth of hotdogs would be worth more to theis person than one dollars worth of hamburgers

Price is a determinant of how much utility we are getting

Consumer Spending Constrained by consumer's income Consumers maximize their utility according to their income

Two effects of Price change:

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Two effects of Price change: Income effects: Normal good (-) Inferior goods (+) Ex. Used car's (the richer you are the less used cars you will buy) Substitution effect Buying less X and substituting it with Y until the optimizing condition is restored (-) If two goods are substitutes you can switch from one to another because they give you the same utility As Px increases, Qx decreases Labor Markets: Labor supply curve Wages People trade leisure for Labor The higher your income the more you demand leisure

Labor

All great countries at a certain point slow down because their wealth increases so they can afford leisure Consumer Surplus The difference between equilibrium price and the price one is willing to pay P Price P' 0
Indifference curve analysis Budget line versus the price Comparing the purchases of two goods

If Pv then the demand will increase and shift out thus increasing consumer surplus D Qx

1/27/11 Properties of Indifference curves Indifference curves for two goods are generally negatively sloped Has to do with opportunity cost
Budget line and what is attainable How do we make choices with a constrained budget. Everything inside the budget line is attainable If there is an increase in income we can afford more Price change effects the line the same way

Difference btw micro& macro - Unemployment= macro Bc I dont like the job=micro (human reaction)

With a fixed rate with a gold standard - We had deflation with an increase of production - Prices decrease as standard of living increases Consumer choice theory - GOOD SUBSTITUTES INFLUENCE CONSUMERS VERY MUCH - Elasticity of Demand Change in price effects quantity demanded The higher the price the lower the quantity demanded Demand curve Addictive substance

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Demand curve It depends how much you value the good.

Addictive substance

Kiwi
Elasticity Substitutes also effect the demand of an object The more substitutes the lower prices and demand for particular goods is elastic On different levels of the market the demand is getting less elastic Demand for food is less elastic because it doesnt have any substitutes

Time: The more time you have the more elastic it is -if you have time constraints then you will end up spending more
Complements Gas and cars - If gas is high people will buy different kinds of cars

Inferior goods Romin noodles and hotdogs vs. a nice meal (depending on income) the higher our income is the less we will buy an inferior good
Demand effected by: Price, income Cross elasticity of demand -change in the complement effects the elasticity of the good Ink and printers

Diminishing Marginal Utility As quantity goes up utility goes down Eating tons of doughnuts - good then ok then bad Stock: Short sale - Borrow shares at beginning of the day, sell right away

Quiz topics: Rationality assumption Scarcity Opportunity cost Incentives Marginal Decisions Property rights Markets: Supply and demand Consumer demand
Firm Production, costs and revenues Marginal production and diminishing returns Average and marginal costs and revenues Long run cost and economies of scale Price ceilings cause shortages

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Average and marginal costs and revenues Long run cost and economies of scale Price ceilings cause shortages

D q Production and the Firm Transaction cost= justification of the middle man The more middle men we have the lower our transaction cost Entrpreneur A person who comes up with ideas for production and services Builds production facility, buy raw materials, hires workers Takes risks for profit Firm: - An institution that hires productive resources and that organizes those factors to produce and sell goods and services - A firms goal is to maximize profit Opportunity Cost: Opportunity cost of producing-- the best alternative action that the firm foregoes to produce a good or service Firms opportunity costs: Explicit costs: Costs which you pay through invoices Direct costs The amounts paid for factors of production Implicit costs: Forgone opportunities - Using own capital - Uses owners time or financial resources - Time Implicit rental rate is the income that the firm forgoes by using the assets itself and not renting them to another firm. The rental income foregone is the opportunity cost of the firm using its own capital Implicit rental rate of capital: The economic depreciation Interest foregone (using an old computer) Economic depreciation is the change in the market price of a piece of capital over a given period of time
Owners Resources: The income that the owner could have earned in the best alternative job Normal profit is the expected return of supplying entrepreneurial ability Communist Manifesto The whole history of human kind is a history of class warfare

Firms and Markets The Firm and Its Economic problem: Firm: An institution that hires productive resources and that organizes those factors to produce and sell goods and services
A firm's goal is to maximize profit

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A firm's goal is to maximize profit Measuring a firm's profit: Economic & Accounting profit Economic: - Opportunity Cost
Efficiency Technological efficiency

The principle agent problem The principal-agent problem The problem of devising compensation rules that induce an agent to act in the best interest of principal
Three methods of copying Ownership Incentive pay Long term contracts

Types of Business Proprietorship A firm with a single owner Partnership A firm with two or more owners who have unlimited liability Corporation A firm owned by one or more limited liability stockholders - Double taxation: initial tax then personal tax Partnerships Cons They generate the most legal lawsuits than anyone else Pros Economy of scale Specialization Market Structure Economists use market struture analysis to categorize industires based on a few key characteristics: # of firms Nature of product Barriers of entry Extent of control over price Four major market types: - Competition - Monopolistic competition - Oligopoly - Monopoly
Competitive Markets: - Characteristics of competitive markets; They have many buyers and sellers each one so small that none can individually influence the price Firms in the industry produce a homogeneous or standardized product Buyers and sellers have all the information about prices and product quality that need to make informed decisions

- Deman curve is horizontal You are a price taker not a price maker

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 You are a price taker not a price maker

Barriers to entry or exit are insignificant in the long run; new firms are free to enter the industry if so doing appears profitable, while firms are free to exit if they anticipate losses

Competition: I. Perfect competition i. Arises when there are many firms each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry II. Monopolistic competition A market structure in which a large number of firms compete by making similar buy slightly different products Product differentiation III. Oligopoly A market structure in which a small number of firms compete IV. Monopoly Market with one seller An industry produces a good or service for which no close substitutes exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms This doesnt happen because of economy of scale - when economies or companies become too big they become unmanageable so companies will split themselves to make themselves more manageable The Four Firm Concentration Ratio
Herfindahl Hirchman Index The square of the percentage market share of each firm summed over the largest 50 firms (or the number of firms if there are less than 50) Range from approximately .5% to 10,000

Barriers to Entry Monopoly does not have any substitutes Oligopolies have the most brutal competition Limitations: Regional vs Global markets Limitations of concentration measures Geographical scope of market Regional markets versus global markets Barriers to entry and turnover Organizing Production Josef Alois, creative destruction: Netflix coming out with a new innovation destroys the old movie market Karl Marx came up with it.
New technologies destroy old technology. Super profits in new technology is justified - this is the engine of change.

Business cycles: Long waves- revolutionary changes at the end of the wave the lenghts of the waves change

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Business cycles: Long waves- revolutionary changes at the end of the wave the lenghts of the waves change with the creation of new technology.

Bubble theory: Expansion of credit creates easy money so people borrow a lot and interest rates are too low and cheap money causes many projects that would not have been put together otherwise Artificial expansion increases the length of the depression. There needs to be a cleansing of bad companies and projects through innovation and creativity Labor Supply Labor, capital, land, and entrepreneurship
Income Vs Leisure The opportunity cost of working is the amount of leisure time that mmust be given up in order to work The marginal utility of income may decline as you earn more The upward slope of an individual labor supply curve is reflectiopn of 2 things: Increasing opp cost of labor as leisure People supply more labor when wages rise

Labor supply curve: Income effects rate Dominate $Per hour Substitute effects dominate

This negative supply response to increase wage rates is referred to as the income of a wage increase A worker might respond to higher wage by working less and not more Market Supply The labor supply curve shifts when the determinates of labor supply change Taste- for leisure income and work Income and wealth Expectations-for income/ consumption Prices -consumer goods Taxes- the higher the tax the less incentive there is to work People work hard until they become wealthy then they slow down

Shifts in market supply Over time, the labor supply cure has shifted leftward A rise in living standards Income transfer programs that provide economic security when not working Increased diversity and attractiveness of leisure activities

Elasticity of laor supply The percentage of change in quantity of labor supply divided by the percentage change in wage rate Institutional constraints: Workers responsiveness to wage is often constrained by the institutional constraints such as specifies work hours such as 8-5 shifts Labor Demans People are only able to work 8-10 hours per day
derived demand The quantity of resources purchased by a business depends on the firms expected sales and

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derived demand The quantity of resources purchased by a business depends on the firms expected sales and outputs Demand for final good services land and labor all materials The principle of derived demand suggests that one way to increase someone's wages is to increase the demand fo the goods he or she produces
Labor demand curve The number of workers hired is not completely dependent upon the demand for the product The quantity of labor demanded also depends on its price (the wage rate) The higher the wage the higher the incentive to invent new technologies Demand for Labor

Wage rate

Quantity of labor
Labor economics and the distribution of income

Principle agent problem Interest within the company is different than outside. Conflict between managers and owners. Moral Hazard The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned Some way to get around this: Give the manager some stock options so that they will put more effort into the work The residual claimant of a company- the share holders (people who have risk in the company) Elected officials given public trust cannot usually be monitored much of the time They pursue personal interests rather than those of the public Principal is the owner of the company Income Distribution National income is the sum of all incomes Income- total amount of money received by a person or household during a given time period Property income such as rents interest and dividends Transfer payments Wealth-value of assets owned at one point in time Tangible items like houses, cars, durable goods, financial assets Income is flow and wealth is stock People are not equal: Abilities and skills Intensity of work Differences among occupations Education Discrimination and exclusion from certain occupations Measurment of inequality Lorenze Curve

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Measurment of inequality Lorenze Curve Depicts the relationship between complete equality and absolute inequality and actual inequality

GINI Coefficient Further tool for measuring of inequality is so called Gini coefficient, which compares actual lorenz curve with the ideal curve A/(A+B) Gini Coefficient can vary from 0-1 G=1 corresponds to extreme case of absolute inequality in incomes G=0 case of absolute equality in income distribution Redistribution Primary distribution- income distribution through economic activities (wages, interests,profits, rent) Income distribution is final distribution of income- income was increased by transfer payments (social security, unemployment insurance, pensions for elderly) and decrased by taxes, fines and other payments to state budget and other funds
Costs

Administrative costs- costs in distribution The impact of working effort and entrepreneurship

Market Externalities and Environment Learning objectives: - Positive externality: walking by a bakery and it smells good (no transaction and there is something you receive that you like) - Negative externality: cost paid by people other than the buyer or seller of a good: pollution
Pollution Problem Without government assistance, Adam smiths invisible hand does little to reduce pollution As pollution is created by imperfect markets and regulated by imperfect governments, there is no ultimate pollution solution (because you cannot privatize everything) Property rights are the biggest protection to pollution

Major thing for economists: how to internalize external costs

Subsidize positive externalities and tax negative externalities

Pigouvian Taxes: Governments should tax goods that create negative externalities Pigouvian taxes reduces individuals incentives to use such goods

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The advantages: Taxation allows firms to pick their own level of pollution Firms have an incentive to reduce their own pollution It will give an incentive to create technology to reduce pollution
Market Failure: Externalities Negative Externalities - polution Positive externalities

Externalities are used to justify government intervention Tradable Permits: Under this system firms are given permits to pollute only up to the asmount covered by the permits A firm can use its permit buy permits from other firms or sell its permits to others The advantages of tradeavle permits are identical to those of Pigouvian taxes They give tremendous flexibility to firms in deciding how to combat pollution They create market for pollution-reduction innovations What is the optimal level of pollution: its on a cost based analysis
Tradable permits vs. Pigouvian Taxes: Only tradable permits allow the government to set the total amount of pollution that will be generated If the government can determine the optimal level of pollution, then tradable permits are socially superior to Pigouvian taxes If the gov doesnt know the optimal level of pollution then the gov should use pigouvian taxes to allow the market to set the optimal level of pollution Tradable permits allows environmentalists to buy permits and not use them. Poor countries The richer you are the more you demand a clean environment Maybe a good solution is to outsource. Rich countries should outsource their industries outside of their country to remove pollution from their cities.

Environment of Externalities and Cost Theory : Cose Theory: If you dont have transaction cost then all environmental problems can be solved by negotiation between two parties-- no government intervention necessary
Labor Economics Distribution of income What determines income?

Skill Differentials - The demand for high skilled and low skilled labor High skilled workers can perform more tasks than low skilled workers Different MRP's - The supply of high skilled and low skilled labor Acquisition of a skill in an investmenr in human capital: Its costly Cost paid prior to receiving higher wages Human Capital is the accumulated skill and knowledge of human beings The equilibrium wage Wage is higher for high skilled labor 5%-10% average return/year on high school and college education - Minimum wage The minimum wage may exceed the equilibrium wage of unskilled wokers especially teenagers Labor Unions Unions exersise monopoly power to secure higher wages for their members

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Labor Unions Unions exersise monopoly power to secure higher wages for their members When union wage exceeds the equilibrium wage unemployment results Insiders: Employed union workers whose interest is to keep wages high Outsiders: unemployed non union workers who prefer equilibrium wages, so there would be enough jobs for them - Efficiency Wage Theory Theories in which higher wages increase workers productivity by: Attracting higher quality job applicants Increasing worker effort, reducing "shirking" Reducing turnover, which is costly to firms Improving health of workers (in developing countries) Firms willingly pay above equilibrium wages to raise productivity - Unions Two types: Craft unions Industrial unions Most unions are members of the AFL-CIO Union membership has declined from 35 percent in 1950 to 12 percent today - Union -Nonunion Wage differentials Local is a subunit of a union that organizes the individual workers Collective barganing Negotiations about wages , working conditions etc. Strike Group decision to stop working for prevailing conditions Lockout Firms refusal to operate plant or employ workers Binding arbitration- process which a third party and arbitrator determines wages and other employment conditions on behalf of negotiating parties Professional associations -organized group of professionals workers such as lawyers, dentists, or physicians These act similar to unions - Objectives of Unions: Increase compensation Improve working condition Expand job opportunities - Constraints: Limited y how well it can restrict nonunion workers from offering their labor in the same market Higher wages result in decrease in quantity demanded of labor World economy makes it difficult for unions to demand too much because of the competition with labor in other countries Union pensions and Healthcare This puts pressure on employers The older your labor force the more costs a company will have - Methods to increase demand for labor Increase marginal product of union members Encourage import restrictions Support minimum wage laws On average union wage rates are 30% higher than nonunion wage rates Monopsony: A monopsony is a market with a single buyer Some areas have a major employer The employer will pay the last worker hired an amount equal to the extra total revenue Decrease the level of employment Differences in sexes for wage earnings:

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Differences in sexes for wage earnings: Job types Discrimination Differences in human capital Differences in the degree of specialization Labor stats: www.bls.gov
Human Capital: Production function: capital labor and land

There is something important to skills and education (human capital) Components: - Education - Health - Nutrition - On-job training - Experience - Skills - Migration Greater Incentives to invest for: Young people Those with Lower mortality rates Those with Likely to remain in labor force Those with Lower and direct opportunity cost Those with greater certainty of the future Those with lower discount rates Tax laws discriminate agianst human capital Human capital deteriorates when it is idle Human capital has certain public good characteristics Public investment in human capital can reduce income inequality
Theory of education: People would stay educated until marginal utility of getting education would be higher than costs

MRP=Firms labor demand This determines the wage rate Demand for labor Derived demand for goods or services Marginal Physical output is the change in total output associated with one additional product of input Eventually declines as the quantity of labor employed increases MRP Marginal revenue product of labor Determines the wage rate Real wages: wages today Nominal wages: combination of all money
In the 19th century when we were on a gold standard, when there was an increase in productivity there was deflation.

Discrimination: In the labor market: - Gender - Race - Employee - Consumer - Age/disability "looks"

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Age/disability - "looks" Statistical discrimination: This form is based on treating an individual on the basis of membership in a group and knowledge of that groups history
Labor market discrimination has a direct connection to poverty

Earnings= hours * wage rate Piece rate- give a lump sum instead of getting paid hourly Work Content Work organization theory Hierarchy of needs - Motivation theory Psychology People are motivated by the need coming after the need just satisfied Basic human need= security Money and total compensation is something that is neutral. The only thing that motivates people is content of work. Carbon Permits: A federal agency will issue carbon credit to companies Corps in europe issue debit cards that can be used when purchasing "green" things and it gives them credit to use carbon-- redistribution of income btween people who consume more energy and those who do not Cose theory: private solution to pollution can be possible if there is low transaction cost Pigovian taxes: subsidizing positive externalities and taxing negative externalities Command and control: tell each firm how much pollution they are allowed to use. It when companies are told what to do

Inequality, Income, Redistribution, and Health Care Poverty: Temporary vs. Hardcore poverty Family structure Age Race and ethnicity Regional differences Relative vs absolute poverty: In most cases poverty is relative Inequality- measured in micro economics

The Lorenz Curve- degree of inequality

% of income

Income a b

The Gini Coefficient The measure of inequality of distribution The higher the gini inequality the higher the differentiation

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The measure of inequality of distribution The higher the gini inequality the higher the differentiation Progressive The higher the income the higher percentage the tax is on income Determinants of income distribution Causes of differences in labor resource ownership Brains and brawn Skill levels Capacity Utilization rate Causes of differences in capital resource ownership Inheritance Luck Propensities to accumulate
Federal Welfare System: 57% of federal budget Income support Health care Food and nutrition assistance- food stamps Housing assistance Training and employment

Problems: Work incentive Family structure incentives Welfare dependency Taxes distort behavior Reduces tastes for discrimination - Education - Legislation
Income vs Wealth Income: (flow) Wealth: anything you value (stock)

Poverty measurement: A state in which a families income is too low to be able to buy the quantites of food, shelter, and clothing that are deemed necessary. Poverty is a relative concept Health Care: Two major areas: - Health care costs Collective Decision Making The Theory of Public Choice Simmilarities in market and public sector decision making Self interest Opportunity cost Competition Similarity of individuals, but different incentive structures Public Choice Theory Government failure in reforming market failure -- The role of government because there is market failure. You need government to correct this failure Government Failure refers to situations where allocative efficiency may have been reduced - Government steps in when: Correct shortages or surpluses Provide when market cannor Regulate when there is inefiecency or inequality - Does government intervene Taxation-redistrubution and provide incentive or disincentive effects

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Does government intervene Taxation-redistrubution and provide incentive or disincentive effects Subsidies- to encourage production/consumption Regulation-guides, codes of practice, legislation, independent regulators Property rights- ownership of property ex. Intellectual prperty, granting of patents etc. Direct provision- health education etc.
Public choice theory: Politicians, beurocrates ands others acting on behalf of public may act in their own self interest as utility maximisers The invisible hand may not work in the provision of public goods Rent seeking or log rolling two important concepts

Calculus of consent-- Smith, Hijack Rent seeking or log rolling Politics involve a series of trad offs in public policy making Traditional theoyr would suggest that the decisions will be made that give the greatest utility to the maximum number of people Rent seeking- where decisions are made leading to resource allocation that maximises the benefit to the decision maker that the expense of another party or parties Log rolling- where decisions may be made n resource allocation to projects that have less importance in return for the support of the interested party in other decision making areas
Government Policy: Eg- decisions on genetically modified crops- were they made on the basis pf public interest at large or to satisfy the farming lobby, the health lobby, the enviornemtal lobby or the GM business lobby?

How does government failure manifest itself? Distortion of markets- rent control, minimum wage, agriculture subsidies, taxes on fuel Welfare impact- erosion of consumer surplus and producer surplus-- eg. EU tariff support for manufactured goods and food Disincentive Effects: - High taxes hampering business expansion or enterprise - Welfare benefits reducing the incentive to find work Short termism- solving the hot topics of the day rather than the long term important issues-eg. Id cards vs pension crisis Electoral pressure: - Desire to get elected and pass popular policies to capture votes - Spending on public services at the risk of higher inflation and futures interest rates Impact on the enviornmet Build new motorways Regulatory capture Regulatory agencies become dominated by firms they are supposed to be regulating Government failure Imperfect info Lack of knowledge - Price - Value - Costs - Benefits - Long term effects - Behavioral changes - External costs and benefits - Value of producers and consumer surplus All means less efficient allocation may result from government intervention Collective decision making

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Collective decision making Public Choice Theory: The cost and benefit of voting- individual maked decisions based on their own cost benefit analysis Benefit= (probability of the vote to make a difference)*(actual benefits receive if candidate wins) Costs=Driving+Waiting time+ voting effort Information content and lobbyng efforts - Concept of concentrated costs and diffuse benefits. Social benefits from not having policy exceeds cast. Trade restriction is a common example - Benefits are diffusely spread out through entire population - Costs are consentrated on a few individuals or firms
Rent vs Profit - Rent=part of the payment to owner of resources over and above the amount those resources could command in any alternative use, over the opp cost Profit=when rent results from satisfaction of new demand or increase the value of resources it is profit

Interest groups - Backbone of public choice theory - Provide majority of legislation Political logrolling - Resource allocation on the most important projects Paradox of Voting - Statistically one vote does not matter - Politicians do ignore groups who do not vote Median-voter Model
Taxation: Progressive Regressive - Sales taxt - The lower your income the higher the percentage the tax you pay of your income Proportional - Flat tax

Interest group effects: - Tarrifs on steal - Rent controls in some cities - Sugar quotas - Milk prices - Farm subsidies - Ethanol subsidies

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