Intermediate Microeconomic Theory

1
Intermediate Microeconomic Theory

• Thinking Like an Economist

2
Thinking like an Economist

• Primary goals of this class were to get you all
  to think deeper about what prices reflect and how
  economic agents react to changes in their costs.
• To do so, we often relied on somewhat technical
  tools.
• The technical tools are there to force a logical
  discipline.
• You start with some reasonable assumptions, and
  then see where the logic takes you as you work
  out a problem.
• Often, this may lead to unexpected or even
  unwanted conclusions.

3
Unintended Consequences

• Consider the Freakonomics article on Unintended
  consequences.
• What was one consequence of the Americans with
  Disabilities Act?
• What was one consequence of the Endangered
  Species Act?

4
Unintended Consequences

• Mandated Employer provided maternity benefits
  (Gruber, American Economic Review, 1994)

5
Unintended Consequences

• Other Examples
• Mandatory Minimum Sentencing Laws (Bjerk, Journal
  of Law and Economic, 2005)

6
Economists and Policy

• Economists certainly do have a lot of influence
  on policy.
• Federal Reserve Bank/Board of Governors
• Council of Economic Advisors
• Office of the Treasury Secretary
• However, it can be amazing how often economists
  are dismissed.
• Consider the new summer gas tax holiday
  proposed by McCain and Clinton as a way of
  helping consumers avoid high fuel prices.
• Why might economists think this is a dumb idea?

7
Economists and Policy

• Stephanopoulos Can you name an economist who
  thinks this (gas tax holiday) makes sense?
• Clinton Well, I'll tell you what, I'm not going
  to put my lot in with economists, because I know
  if we get it right, if we actually did it right,
  if we had a president who used all the tools of
  the presidency, we would design it in such a way
  that it would be implemented effectively.

8
Economists and Policy

• People respect that energy cannot be produced
  from dirt because physicists say so.
• People respect that cancer cant be cured by
  leeching because medical researchers say so.
• Why isnt this the case with economics?

9
Economists and Policy

• My sense is that economic questions are often
  conflated with questions of what is just, what
  is right.
• Economics can rarely answer those questions.
• Rather, if society determines what is just,
  economics is very useful for answering how best
  we should achieve that goal.
• The difficulty is that the policy prescriptions
  are often more difficult than we want them to be
  (hence the moniker The Dismal Science).
• This is especially true for politicians, who then
  in order to get elected, try to convince the
  public that there are easy solutions.

10
Economists and Policy

• So what do I really want you to take away from
  this class?
• No free lunch principle. There are no easy
  answers.
• Almost every solution has a cost. Try to
  understand what that cost is, and if the
  potential benefit of the solution outweighs it.
• This often might put you at odds with your peers,
  regardless of your political ideology. Stick to
  your guns though, and try to use reason not
  religion.
• Consider the following quote from The Armchair
  Economist.