Using Benefit/Cost Analysis in Micro Principles
Cheryl L. Cohn,
The following is a short (3 page) paper assignment I give my Principles of Microeconomics students to help them understand that economic role of government and the way economists use rational choice in evaluating public policy. The role of government is typically discussed in the market failure context of externalities, public goods, market power, etc. The idea of rational choice of economic decision-making is one of the key concepts in microeconomics. Once the idea of rational choice has been presented to students, they are capable of applying the concept to policies at the federal, state, local or even university levels.
I require each student to find an article on a policy or administrative decision, the lower the administrative level the better. Some examples students have found were whether to install a new stop sign, to build a new park or jail, or to have longer visiting hours in the dorms. The student must then identify a problem that the policy is designed to correct, specifically relating it to the market failure concepts discussed in class.
The student lists the benefits and costs of the policy, explaining which groups in society will receive the benefits or incur the costs and why, and then decides if the policy is rational based specifically on the benefits and costs. Finally, I require that they provide an alternative policy to show them that there is seldom only one way to solve a problem.
If the instructor does not wish to have students write papers on their articles, the students can bring the articles to class. The instructor can choose some of the topics to analyze in class and achieve the same goals, although in a more passive learning style.
Transactions Cost in Scheduling Exams Democratically
Josef M. Broder,
In recent years the concept of transaction costs has emerged in many introductory economics textbooks. Once assumed to be negligible, transactions costs are now used to explain many cases of market and/or collective failure. To illustrate the impact of transaction costs on collective decision‑making, I solicit class input on scheduling the midterm exam. The class is asked to decide when the midterm will be offered within a specified two‑week time period.
First, I impose a unanimity rule whereby all class members must agree. Initially, students feel this rule is fair. Later, students learn that such a rule is impractical due to the high transactions cost of achieving unanimous consent. After a two‑week impasse, I impose a two‑thirds majority which lowers the transactions cost for the class, increases the probability of reaching a decision, but imposes political externalities on the dissenting minority.
If another impasse is reached, a simple majority rule is imposed, lowering transactions costs further, thereby increasing the probability of a solution, as well as imposing additional political externalities on the dissenting minority. In some instances, the class was unable to reach a decision by midterm and abdicated the decision to the instructor. Thus, the exercise proved useful in illustrating relationships among transactions costs, collective behavior, and the limits of democratic processes.
The Government Economics Problem
Calvin A. Kent,
The purpose of this exercise is to demonstrate to students the difference between how economic decisions are made in the marketplace and how they are made through the political process. A list should be distributed to each student at the beginning of the period which contains 10 desirable expenditures that could be made by a city government. A brief explanation of each should be included indicating the need for the program. The students should be told what the total budget of the city is. The amount should be insufficient to allow all 10 projects to be undertaken. Each student should budget the money available by listing in priority the projects which he favors. No one can spend more than the budget, but students could spend less if they wish to hold city money in reserve. Next, students should meet with other students who share their highest priority at various locations throughout the room. These "interest groups" prepare a brief advocacy presentation to be made to the others in the class indicating why their project should be included in the budget.
The students should then be assigned to various communities. Care should be taken that members of the special interest groups are widely dispersed among the various communities. Each community should then prepare its own budget indicating how the limited funds should be spent. At the end of the exercise the teacher should record what the preferences were of the various communities indicating which programs were adopted and which were rejected by each. The teacher should then point out to the students the following:
1. All economic decisions, public and private, involve opportunity costs.
2. Individual preferences are not necessarily going to be the same as the community preferences when group decision‑making takes place.
3. Special interest groups have a tremendous influence upon what is and what is not included in a government budget.
4. People cannot adjust their payments and consumption to reflect their personal preferences when political decisions are made as wall as they can in the market In the political arena payment is obligatory and reflects group rather than individual priorities.
5. Various methods are used to reach political decisions, such as voting, dictatorship, compromise, etc.
6. Different communities will have different preferences for government projects based on the desires of those who are part of the community.
PROSTITUTION AND ECONOMIC CONCEPTS
John Rapp,
Ask the class to pretend that they are a small economy with
all the characteristics of the
Then solicit volunteers or appoint individual students to play various roles--the head of the government (president or mayor), a chief of police, a public health officer, two female owners of brothels, one rich male customer, one poor male customer, and the head of a volunteer morals squad. Direct the morals squad chair to pressure the governmental head to enact legislation making prostitution illegal. (You have to insist, for instructional purposes, that prostitution now becomes illegal.)
Then question the various players about what happens. The chief of police will recognize that more law enforcement resources are necessary--which can only come from fewer police doing other duties, less of other governmentally provided services, or higher taxes and fewer private goods. The governmental head also becomes involved in this discussion. This drives home the point of opportunity cost. Ask the brothel owners what they will do; go underground and charge higher prices, because of increased risk. Ask the public health officer for his or her concerns about the social costs of increased social disease that would likely result. Inquire as to the differing effects on the two customers. Talk about the victimless crime issue and the issue of free choice.
This can be a long or short exercise. Either way, make lists of the costs and benefits of making prostitution illegal noting that simple economic analysis is an excellent way to examine social issues. Similar exercises can also be undertaken for other illegal items, the drinking age or speed limits.
The Problem of Government Monopoly
Ray M. Johns,
A monopoly is a monopoly is a monopoly, regardless of who owns it. A good example of the undesirable characteristics of monopoly, even if government owned, is State owned liquor stores. Privately owned liquor stores licensed by the State Government and restricted in number are invariably quite profitable and offer an open display of many varieties and brands of various types of alcoholic beverages. State owned liquor stores are usually more limited in number, charge higher prices, keep all the liquor hidden on shelves in the back, and have many more employees than are needed. They also rarely make a profit for the State since they are operated for the benefit of the employees, not the customers. These jobs are often patronage rewards for assisting in political campaigns.
Do We Really Want Lower Taxes and Less Government?
Ralph T. Byrns
A quick poll of the students in virtually any college classroom will reveal a widespread call for "lower taxes and less government." After ascertaining that this is true through a show of hands in your class, either list a large number (20 or so) of present or proposed government activities (e.g., socialized medicine, national defense) on a chalk board or pass out detailed lists of such activities (perhaps to have students take them home to record their responses). One activity at a time, have students indicate by shows of hands whether they favor: (a) eliminating the specific activity by government; (b) substantially decreasing the funding for the activity; (c) keeping the activity at present levels; or (d) increasing the government's participation in this area. They will be surprised (and you may be as well) when virtually all classes vote for substantial net expansions of many, or even most, government programs. When asked to account for this seeming paradox, some students may argue that most people want greater efficiency‑‑more and better quality government services at lower tax costs. You can question whether greater efficiency in government is likely, regardless of who holds office, and then contrast the efficiency of marketplace resource allocations with those resulting from public sector decision making. We have found that this exercise invariably generates enthusiastic class participation.
Mutually Beneficial (?) Student‑Teacher Exchange
Gary Galles,
I once assigned a 20‑page typewritten paper to my students. One of the students, who had finished writing her paper (as close to the minimum length as possible), but who couldn't type came up with a (facetious) innovative proposal for a mutually beneficial exchange. Since the "going rate" for typing was $2.50 per page, it would cost her $50 plus some hassles to get it typed, but as an alternative she would turn in her legibly written paper plus $25 to compensate me for how much slower and how much more effort it would be to read than a typed paper.
Is this a good deal? It is for her, since it costs her less this way than the alternative. In a narrow sense, it may be for me as well. The answer depends on how much extra time it would take and the opportunity cost of my time. If, for example, it would take me six minutes extra to read it and the opportunity cost of my time is $50, than any price over $5 would make this a good deal for me as well. As long as the maximum she was willing to pay (based on the cost of getting it typed) exceeded the minimum I was willing to accept to read it handwritten, we could both be better off.
Is there a problem with this? Yes‑‑the same problem as with PAC or industry donations to a particular political candidate: the possibility of external costs to be imposed on others involved. If this could be construed as a bribe that would lead to this student's or PAC's interests being considered over others, these others (students or taxpayers) would be made worse off (or at least feel worse off, even if it really wasn't a bribe), by taking away from them to give to the favored one(s). Oh well‑‑another money‑making idea down the drain!
Efficient Resource Allocation and Information
John P. Cochran,
Resources are allocated efficiently if the combination of ends achieved is more valuable to society than any other feasible combination. Efficient economic decision‑making requires a society to develop institutions that:
a. cause decision‑makers to reveal their preferences.
b. transfer information about preferences to owners of resources and information about relative scarcities of available means to potential users.
c. create incentives for resource owners to use their resources to accomplish the most urgently needed ends.
Discuss the circumstances under which the market is such an institution. Then show how in cases of market failure market signals fail to do at least one of the three tasks listed above. Discuss how lack of information about the relevant preferences, strategic voting, legislative strategies, bureaucracy, etc., hinder the government's ability to correct market failure.
Public Choice And Trade Policy
Scott Brunger,
This role‑playing model requires selecting a few students to fill specific roles.
THE ISSUE: A Proposed Status Quo Trade Act ‑ To protect American jobs by raising trade barriers in all industries where American employment is declining.
PLAYERS' GOALS:
a. The purpose of being a Senator is to be re‑elected
by your constituents. Otherwise, you go back to being an obscure lawyer after
your heady years in
b. The purpose of being a lobbyist is to get your legislation passed. If you fail, you will be fired and have to find a job as a motel night manager or, heaven forbid, a college professor. Your money can be useful to build a coalition.
Each senator will have a two minute presentation. Then, we will adjourn for a break during which you can lobby each other. Afterwards, you meet for 20 minutes to vote amendments. A cloture rule will require a final vote. A half‑hour debriefing will follow the game.
CHARACTERS:
Vice‑President Shrubby‑‑presides over the Senate, and casts tie‑breaker votes. Is concerned with reelection of himself and President Spacestar in the face of severe economic stagflation.
Senator Camaro
of
Senator Blount
of
Senator Empire
of
Senator Windy
of
Senator Salmon
of
Senator Crank
of
Senator
Corny of
Senator Smiles
of
Senator Milch
of
Senator
Stetson of
Oily Smooth ‑ lobbyist for the National Association of Multi‑ national Corporations.
Ima Shopper ‑ lobbyist for the Federation of Consumer Coops.
Mr. Muscle ‑ lobbyist for the Syndicate of Manufacturing Workers.
Poli Glot ‑ lobbyist for the Association of Import‑Exporters.
Agri Big ‑ lobbyist for the Farm Bureau
Pin Stripe ‑ lobbyist for the Consortium of Global Banks