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Preface

Preface. Objectives of the course. The main goal of this course is to learn how to assess the role of the government (or a central planner) in economic realm. Develop some analytic and theoretical tools that encourage critical thinking about microeconomic questions.

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Preface

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  1. Preface

  2. Objectives of the course • The main goal of this course is to learn how to assess the role of the government (or a central planner) in economic realm. • Develop some analytic and theoretical tools that encourage critical thinking about microeconomic questions. • Equip students to move on to more advanced economics courses.

  3. Materials • Required Text: Price Theory, Steven E. Landsburg, 8th ed. • Better stick to this edition. • Other reading materials: Additional references, specified as required or recommended, will be occasionally linked to the course web page. • Powerpoint slides, practice questions, answers, and other reading materials will be available online. • http://homepage.ntu.edu.tw/~elliottfan/micro2.htm

  4. About me Elliott Fan Assistant Professor Economics Department National Taiwan University • Email: elliottfan@ntu.edu.tw • Office hour: Wednesday 11-12 • Venue: Graduate Building R404

  5. Course evaluation • Note:Except for emergency cases, no special consideration on grading will be granted.

  6. Quizzes and exams • The scope is focused on but not limited to lecture notes, textbook, required reading materials. • Presentation topics and discussion are also included. • Numerical questions are not the only form.

  7. Group presentation • You should select a topic, form interesting questions, develop analysis and possible answers, design and deliver the presentation. • In general, all kinds of micro-economics related topics can be considered. Available sources of topic can be found online, in pubic media, books, documentaries, academic journal articles etc. • Talks, as well as all Q and A, should be delivered in English. The length of the presentation is 20-minute long, followed by comments, discussion, and Q and A for 5-10 mins. • After each presentation, the presenter should submits the slides to the teacher.

  8. Group presentation • You are required to submit a proposal (via email or in class) 2 weeks before the presentation date. The proposal should be clearly written, with reading materials, questions, and issues to be discussed specified in it. The proposal will be approved or required to be modified if necessary. • I myself will demonstrate how to present a talk.

  9. Regarding math • I am assuming that all students have learned fundamental calculus. • This course will involve applications of various mathematic tools. • If you have any difficulty in following math, please let me know. • Note that intuition is by any means more important than using math.

  10. Your teaching assistants Yi Li r01323005@ntu.edu.tw A master student in economics

  11. How to get a great mark • Get involved. Be active. • Make use of study group. • Complete everything by yourself. • Develop skills as well as intuition

  12. Why economists like to blog? • Economists seems more inclined than people in other fields to become a blogger. • Some argue that because they feel being ignored by the government. • Recommended blogs: 1. freakonomics 2. gregmankiw 3. The Becker-Posner Blog

  13. Knowledge and Information Chapter 9 (one of the best chaps)

  14. Introduction • How can all suppliers know how to supply goods • Prices convey information • Enable complex social activities to be organized and implemented • Act to allocate resources efficiently by ensuring appropriate quantities get produced • Contribute to efficient production and distribution because embodies knowledge not available to any one individual

  15. Introduction • This highlights the importance of stable price, which is often considered as the most important task of central banks.

  16. Section 9.1 The informational content of prices

  17. Setting Prices Involves weighing importance of alternative uses of resources if want rational choice

  18. Information • Assemble panel of experts to provide report • Alternative, observe price of resource • Free to observe prices • Provide appropriate incentives to act on information • Do not coexist with social planner • Use of knowledge in society

  19. Costs of Misallocation • Allocation decisions not made on basis of price • Overstate actual gains to society if use traditional measure of social gain • Underestimate losses if use traditional measure of deadweight loss

  20. Landsburg, Price Theory, 8th edition

  21. Landsburg, Price Theory, 8th edition

  22. Costs of Misallocation • Ex. Military draft

  23. Military draft Why is the conclusion misleading? • There is no guarantee that only individuals left of Q0 will be drafted given the random selection.

  24. Military draft How about a market for drafts? • There is a concern for “fairness” • Michael Sandel has some discussion on this issue.

  25. Costs of Misallocation Continued • Social role of rent • Pay to factor of production • Excess of minimum payments necessary to call it to existence • Producers’ surplus earned by the factor • Fixed supply of factor means revenue earns consist almost entirely of rent

  26. Costs of Misallocation Continued • An efficient allocation of land demands an incentive for land owners to distribute lands to those with highest values. • This is something often ignored by careless policy makers.

  27. Section 9.2 Asymmetric information

  28. What is AI? • It takes multiple forms, but the essence of all AI issues is that the suppliers and demanders do not share the same set of information. • This is a very common phenomenon in our daily life. • Recall the First Fundamental Theorem of Welfare Economics. • A market fails to achieve Pareto-optimal outcome Results?

  29. Topics • Education as signaling • Adverse selection (Lemon cars market) • Moral hazard (insurance programs) • Principal-agent problems

  30. Adverse Selection • Problem • Arises when asymmetric information • Indicates that people know more about their own risk characteristics than others do • Akerlof’s market for lemons • 2 types of cars • If perfect information, sell all of both types • A common issue in insurance markets

  31. Market for lemons • In reality, it is often the case that one of the transacting party has less information than the other. • Consider a market with 100 people who want to sell their used cars and 100 people who want to buy a used car. Everyone knows that 50 cars are lemons and 50 are plums. The current owner knows the quality of his car, but the potential purchasers do not.

  32. The owner of a lemon is happy to part with his car for 1000 and that of a plum for 2000. The buyers are willing to pay 2400 for a plum and 1200 for a lemon. • If information is symmetric, then the plum will sell at some price between 2000 and 2400 while the lemon between 1000 and 1200. • However, if buyers do not know how much each car is worth, then they are willing to pay the expected value.

  33. Since there are 50 lemons and 50 plums, thus buyers are willing to pay up to 0.5x1200+ 0.5x2400=1800. • Yet at 1800, only the owners of lemons are willing to sell their cars. However, in equilibrium, buyers cannot have wrong expectation, so they expect to see only lemons in the market. When this happens, they are willing to pay only 1200. Thus only lemons get sold while none of the plums do. This differs from the case when information is symmetric.

  34. Adverse selection -- solutions • Compulsory purchase plan • Reputation and standardization • Warranty • Safety examination

  35. Financial Crisis of 2008 • Borrowers unable to find willing lenders • Adverse selection • Market for home mortgages • Information imbalance • Some banks with better default probabilities information than others

  36. Adverse selection -- evidence • Whilst adverse selection in theory seems an obvious and inevitable consequence of economic incentives, empirical evidence is mixed. Several studies investigating correlations between risk and insurance purchase have failed to show the predicted positive correlation for life insurance,[3] auto insurance,[4][5] and health insurance.[6] • On the other hand, "positive" test results for adverse selection have been reported in health insurance,[7] long-term care insurance[8] and annuity markets.[9] • These "positive" results tend to be based on demonstrating more subtle relationships between risk and purchasing behavior (such as between mortality and whether the customer chooses a life annuity which is fixed or inflation-linked), rather than simple correlations of risk and quantity purchased.

  37. Moral Hazard • It is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others. • Insurance companies • Adjust rates accordingly • Gives insured incentive to behave appropriately • Unable to verify valid claim

  38. Moral Hazard – example 1 • In Taiwan, Government Employees’ Insurance and Farmers’ Insurance offer disability benefits to uterus failing for women aged under 45, inducing hysterectomy (the surgical removal of an uterus).

  39. Moral Hazard – example 1Hazard by quarterage - Total and partial hysterectomies

  40. Moral Hazard – example 2

  41. Principal-Agent Problem • Inability of principal to verify the behavior of agent

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