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 can’t be cured by leeching because medical researchers say so. • Why isn’t 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.