Transcript Lecture 3

Assumptions of the Economic Model
• A.K.A. Rational choice, public choice, political
economy
• Individuals are the unit of analysis
• Individuals are self-interested
• Utility maximizing
• Intelligent and creative
• Respond to changing information (not just
creatures of habit)
The Efficiency Benchmark: The Competitive Market
• Self-motivated behaviors of economic actors in an
idealized economy create an invisible hand
• Invisible hand: Leads to EFFICIENT patterns of
production and consumption (an equilibrium)
• Several assumptions of an idealized competitive
economy:
– RC assumptions of human behavior
– large # of producers and consumers
– Exit and Entry barriers are small
– Free flow of information
The Efficiency Benchmark: The Competitive Economy
• General Equilibrium Model, an idealized
competitive economy:
– “finds the prices of factor inputs and goods that
clear all markets in the sense that the quantity
demanded exactly equals the quantity supplied”
– Rational consumers respond to supply (prices)
– Rational producers respond to demands (prices)
The Invisible Hand & the Demand and Supply of Goods
• Marginal Utility
– If the price is below the marginal utility of the
consumer the consumer will continue to purchase
units of good
– If the price is above the marginal utility of
producing a good, the producer will continue
producing the good
Efficiency and the Idealized Competitive Market
• Caveats: Models and Reality
– limitations to the general equilibrium model:
• A perpetually incomplete model (simple/parsimonious)
• Its necessary assumptions are “often violated in the
‘real world’”
• Gupta – Market failure
– Lack of competition, information asymmetries, externalities
• Stone – the market is not a good model of society
Efficiency and the Idealized Competitive Analysis
• Conclusion
– In spite of limitations of the necessary
assumptions, analysis through the use of the
general equilibrium model can be very useful for
“helping policy analysts get started in
understanding the complexity of the world in
which they work” (Weimar & Vining, p. 69)
– Idealized competitive economy is useful
conceptual framework for thinking about
efficiency.
Stone’s model of politics
• “A theory of policy politics must start with a
model of political society, that is, a model of
the simplest version of society that retains the
essential elements of politics.”
• In searching for the elements of politics, it is
helpful to use the market model as a foil
because of its predominance in contemporary
policy discussions. The contrast between the
models of political and market society will
illuminate the ways the market model grossly
distorts political life.
• Because politics and policy can only happen in
communities, community must be the starting
point of the polis. Public policy is about
communities trying to achieve something as a
community. Unlike the market, which starts
with individuals and assumes no goals,
preferences, or intentions other than those
held by individuals, a model of the polis must
assume both collective will and collective
effort.
• Membership in a community defines social
and economic rights as well as political rights.
Stone and the Public Interest
• Essentially within a market the empty box of
public interest is filled as an afterthought with
the side effects of other activities. In the
polis, by contrast, people fill the box
intentionally, with forethought, planning, and
conscious effort.
Stone and Problems
• In market theory, common problems are
thought to be the exception rather than the
rule. In the polis, by contrast, common
problems are everything. Most significant
policy problems are common problems.
Stone, Influence, Cooperation, Loyalty
• Behavior can be influence by others
(individual vs. group)
• Cooperation is often looked down upon in
model of the market (collusion)
• Political alliances bind people over time. In
the market, people are “buyers” and “sellers”.
Stone, Passion and Power
• Passion is a unique resource, it feeds upon itself, can
spread
• Power is the primary defining characteristic of a
political society and is derived from all the other
elements. It is a phenomenon of communities. Its
purpose is always to subordinate individual selfinterest to other interests-sometimes to other
individual or group interests, sometimes to the
public interest.
• Any model of society must specify its source
of energy, the force that drive change. In the
market model, change is driven by exchange,
which is in turn motivated by self-interest.
• In the polis, change occurs through the
interaction of mutually defining ideas and
alliances. Ideas and passions about politics
shape political alliances, and strategic
considerations of building and maintaining
alliances in turn shape the ideas people
espouse and seek to implement.
Gupta – Government Failure
•
•
•
•
•
•
•
•
Inability to define social welfare (problems)
Limits of Democracy (paradox of voting)
Inability to estimate marginal costs/benefits
Political, legal, cultural constraints
Institutional constraints
Knowledge constraints
Analytic constraints
Timing of policies