Podcast
Questions and Answers
What is the primary role of public economics in resource allocation?
What is the primary role of public economics in resource allocation?
Which fundamental question addresses why free market mechanisms may require additional policies?
Which fundamental question addresses why free market mechanisms may require additional policies?
What does the first theorem of welfare economics suggest?
What does the first theorem of welfare economics suggest?
When may the market fail, requiring the introduction of public economics?
When may the market fail, requiring the introduction of public economics?
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What is a common tool used in public economics to influence resource allocation?
What is a common tool used in public economics to influence resource allocation?
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What does the total endowment of the economy represent?
What does the total endowment of the economy represent?
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In the allocation of goods, what do the variables $X_{0A}$ and $Y_{0A}$ signify?
In the allocation of goods, what do the variables $X_{0A}$ and $Y_{0A}$ signify?
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When analyzing an Edgeworth box, what is the significance of the point $(x_{0A}, y_{0A})$?
When analyzing an Edgeworth box, what is the significance of the point $(x_{0A}, y_{0A})$?
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In the Edgeworth box model, which statements about the goods X and Y are true?
In the Edgeworth box model, which statements about the goods X and Y are true?
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What is the primary function of the Edgeworth box in economic analysis?
What is the primary function of the Edgeworth box in economic analysis?
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What does the Karldo-Hicks improvement allow for?
What does the Karldo-Hicks improvement allow for?
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Which social welfare function implies that utility from rich individuals can completely substitute that of poorer individuals?
Which social welfare function implies that utility from rich individuals can completely substitute that of poorer individuals?
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What is a key consideration when attempting to combine both efficiency and equity in policy design?
What is a key consideration when attempting to combine both efficiency and equity in policy design?
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Which of the following indifference curves represents a higher level of social welfare than another?
Which of the following indifference curves represents a higher level of social welfare than another?
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What is a characteristic of the Rawlsian social welfare function?
What is a characteristic of the Rawlsian social welfare function?
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What does the Utility Possibility Frontier illustrate?
What does the Utility Possibility Frontier illustrate?
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What challenge does the absence of win-win scenarios present?
What challenge does the absence of win-win scenarios present?
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What does the variable α represent in the Edgeworth Box framework?
What does the variable α represent in the Edgeworth Box framework?
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In the Edgeworth Box, which corner is the origin of the allocation plane for dealer B?
In the Edgeworth Box, which corner is the origin of the allocation plane for dealer B?
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What is represented by the borders of the Edgeworth Box?
What is represented by the borders of the Edgeworth Box?
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Which utility curve represents the highest level of satisfaction for dealer A?
Which utility curve represents the highest level of satisfaction for dealer A?
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What does the term 'Pareto Improvements' refer to in the context of the Edgeworth Box?
What does the term 'Pareto Improvements' refer to in the context of the Edgeworth Box?
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In an Edgeworth Box, which area indicates the feasible trade possibilities between the two dealers?
In an Edgeworth Box, which area indicates the feasible trade possibilities between the two dealers?
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Which of the following curves represents the lowest utility level for dealer B in the Edgeworth Box?
Which of the following curves represents the lowest utility level for dealer B in the Edgeworth Box?
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What does the allocation point α0 signify in the Edgeworth Box?
What does the allocation point α0 signify in the Edgeworth Box?
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Study Notes
Today's Agenda
- Course information and administration will be covered
- A theoretical framework will be discussed
- Introduction to public economics is part of the agenda
- The first theorem of welfare economics will be explored
- Two-good pure exchange (endowment) economy will be examined
- The social welfare function will be studied
- Recent trends in public economics are part of the agenda
- Evidence-based policy making is a key topic
- The "Credibility revolution" will be discussed
What is Public Economics?
- A community is a group of at least two individuals (N ≥ 2).
- Resource allocation is a key concept within economics
- Commodity examples include wheat and meat
- A community can contain individuals such as John or Kate
What is Public Economics? (Policy)
- Public economics involves policies intended to improve welfare through resource allocation
- Policies include taxes (fees, charges, contributions, subsidies), market/industry regulations.
- Achieving desirable allocations forms a key part of the discussion.
Safety Instructions
- Evacuation procedures are outlined
- Safety measures for students include instructions on the procedure
- Attend lectures, tutorials only during allocated time to avoid overcrowding
- Smoking is prohibited on university grounds and workplaces
- Speed limit applies to UWA business school basement car park (15km/h).
- Car parks restricted to staff only between 8 am- 5 pm
- Contact phone number is provided for emergencies
Theoretical Framework (Title Slide)
- A slide entitled Theoretical framework appears in the presentation.
Why Public Economics?
- The starting point is the first theorem of welfare economics, stemming from Adam Smith's "invisible hand" concept
- Desirable resource allocation (Q(P)) is automatically achieved through market equilibrium price (P)
- Market failure can cause a need for public economics involvement
- Public economics will be studied.
First Theorem of Welfare Economics
- The first theorem of welfare economics involves general analytical theory used to reason about market failure and government policies
- A benchmark for studying market issues.
- Perfectly competitive markets for all goods form the theoretical conditions under which a market economy arrives at Pareto efficient allocation outcome.
- Pareto efficiency means that making anyone better off requires making someone else worse off
- Pareto improvement means if a change makes everyone better off.
Two-good economy
- Study of a pure exchange (endowment) economy in a two-good environment (wheat and meat) is a focus.
- The focus is on the economy with two consumers, and two commodities (wheat and meat)
- Initial resource allocation is important to the model
- The model does not examine production factors.
Each consumer's problem - Graph
- Optimal condition: tangent point between indifference curve and budget line.
- Marginal Rate of Substitution (MRS) equation.
Each consumer's problem - Algebra
- Each consumer chooses their most desirable consumption bundle.
- Consumers have preferences expressed by utility functions and endowments.
- Market prices are assumed to be known to the consumer.
Each consumer's problem
- Maximize utility subject to a budget constraint given market prices and endowment.
- Optimal choice (resource allocation) determined using MRS, price of goods and endowments.
- Expenditure and market values used in optimization calculations
Edgeworth box
- Two consumers trading is the core concept.
- The total endowment comprises the (total) available amount of each good (or commodity).
- The Edgeworth box can be used to visualize trade and allocation
- Allocation is in relation to total endowment
Edgeworth box
- Putting a 2x2 economy into a box demonstrates a model of resource allocation and trade in the economy
- All allocation possibilities within the box can be visualized
- Setting corners and borders of the box are key in defining allocation variables.
The Edgeworth Box - Problem for Dealer A/Dealer B
- Two different problems, focused on Dealer A and Dealer B, are presented
- These specific problems are part of the model related to the Edgeworth Box
The Edgeworth Box - Pareto Improvements
- This part of the presentation examines Pareto improvements within the Edgeworth box model.
- The concept of potential gains from trade, between particular consumers, is discussed.
The Edgeworth Box - Contract Curve
- The contract curve displays all tangent points for indifference curves in an Edgeworth Box
- The contract curve illustrates all Pareto efficient allocations for two or more consumers
- Marginal rates of substitution are equal along the contract curve.
Optimal consumption
- Optimal consumption choice
- The MRS between two goods (equal to relative price), is a crucial concept discussed here.
The First Theorem
- The contract curve contains allocations that are Pareto optimal.
- Any movement off the curve within the "lozenge" is a Pareto improvement
- Optimal consumption choice is determined by the market price.
- Market price is a coordinator of consumption choices among consumers.
- Market equilibrium is considered a Pareto optimal allocation point.
Edgeworth Box - Pareto Improvements Through Trade
- Illustrates how trade can lead to Pareto improvements visualized by the Edgeworth box.
- An economy at a market equilibrium is Pareto optimal
- The slope of the price ray is equivalent to the relative price of the two goods.
First Theorem of Welfare Economics
- In the context of Pareto efficiency, a "win-win" outcome is impossible.
- The efficiency criterion only assesses if making someone better off does not make any one else worse off.
- Less stringent requirements are needed for policy assessment considerations (win-lose).
- Equity considerations are examined
- Market outcomes might need policy improvements.
From Contract Curve to Utility Possibility Frontier
- The model for the Utility Possibility Frontier is related to the contract curve of the Edgeworth box
- Illustrative diagrams and graphs are included
Utility possibility frontier
- The utility possibility frontier displays the utility combinations that are feasible for a community given its initial allocation or endowment of resources
- Individual indifference curves and social welfare outcomes are explained
Social welfare function
- The social welfare function uses utility to combine social preferences.
- The model explains the utility combinations of various social welfare function possibilities.
Social welfare function (SWF)
- Social welfare function differs based on how substitutable the rich's utility is with the poor's.
- Utilitarian SWF = sum of individual utilities
- Rawlsian SWF = minimum utility level for all individuals
- Partially substitutable (Atkinson) SWF uses a parameter ε which measures the degree of inequality aversion.
Social optimal
- This model explores different levels of social optimal outcomes.
- The optimal outcomes are at the tangent points where social welfare function is maximized.
- These are visualized in the model diagrams.
New Trends
- A title slide on New Trends appears in the presentation.
Evidence-based policy making
- Defining evidence-based policy (EBP) as a critical component
- Policy decisions should depend on objective evidence, based theory and reasoning, and not simply ideology or common sense.
- Political drivers of policy are considered as non-EBP elements, and are compared to established approaches
Evidence-based policy making
- The presentation includes a discussion on why EBP emerged
- Key concepts in empirical economics known as the "credibility revolution" are examined
- The design and implementation of transparent research are explored (similar to natural science methods)
- The causal relationship between variables is a key part of defining research questions.
- The goal is good measurements of variables.
Conditions of EBP and Research trends
- The types of data that can be used in EBP
- Transparent methods for data analysis explored
- Experiments used
- Machine learning applied
What are we talking about in public economics?
- Textual analysis of public economics papers
- NBER papers focused on Public Economics serve as a key source of data
- Analysis of full texts is involved
We Talk Less about Taxes than We Used to Do
- A visual demonstration for a period analysis of the discussion of public economics topics.
- Taxes discussed less frequently than topics such as regulation, and political economy in studies.
- The topics analyzed include discussion relating to taxes in a broader context (including property, capital, consumption and labor, and income taxes).
When We Do Talk About Taxes, Which Taxes Do We Talk About?
- Trends in what type of taxes are discussed in the papers considered.
- Discussion of taxes is skewed towards certain areas (income tax, capital taxes etc)
We Talk Mostly about the US, But Less So over Time
- This graph displays a time comparison of papers focused on the US economy.
- Discussion has moved from a US-centric focus to discussions of other countries
When We Don't Talk about the US, Who Do We Talk about?
- Time analysis and trends of discussion focus moving from a US-centric view to include discussion related to other countries. (India, China, etc).
The Identification Revolution
- Evolution of the focus, in papers studied, on the topic of "identification".
- Increase over time in the emphasis of this topic.
The Rise of Experiments
- Trends over time of the focus on different types of experiments.
- Rise of Natural and Quasi experiments and RCT types of experiments over time.
The Rise of Quasi-Experiments
- Trends over time in the use of specific types of Quasi-experiments in academic papers.
- The different types of Quasi-experiments explored include; Diff-in-Diff, Regression discontinuity; bunching, event study.
The Rise of Administrative Data
- Trends in the use of administrative data in the academic papers considered
- The analysis is over time
Big Data & Machine Learning
- Trends over time related to big data and machine learning concepts.
- Analysis over time of the frequency of papers incorporating aspects of these topics
The Rise of Behavioural Economics
- Trends over time in behavioural economics
Identification
- Randomized experiments in natural sciences
- Randomization is done to create comparable treatment and control groups
- The difference in outcome measured as the treatment effect.
- Methods are outlined in papers.
Machine learning (ML)
- Traditional empirical model analysis and the limitations
- Machine learning approach.
- Data driven methods used
- Uncertainty analysis of the models is incorporated.
- Model uncertainty is a topic
EBP + ML
- Integrating evidence-based policy making and machine learning to understand the relationship between the two elements
- Models of relationships between these components are used in studies.
Summary Information
- Theoretical framework (introduction and resource allocation)
- First theorem of welfare economics
- Pareto optimal allocation, common market signal, dealing with efficiency and equity
- New trends include evidence-based policy making and credibility revolution
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Description
This quiz explores key concepts in public economics, focusing on its role in resource allocation and the conditions for market failure. Questions cover theorems of welfare economics, Edgeworth boxes, and social welfare functions, providing a comprehensive understanding of economic analysis tools.
