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The Players and the Goals Two types of consumers Non-smokers (eat pizza). Smokers (eat pizza and smoke) Consumers’ goal: Maximize utility. Cigarette firms make and sell Cigarettes Each firm’s goal: Maximize profit. The Players and the Goals Two types of firm

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Presentation Transcript
slide1

The Players and the Goals

  • Two types of consumers
    • Non-smokers (eat pizza)
    • Smokers (eat pizza and smoke)
  • Consumers’ goal: Maximize utility
slide2

Cigarette firms make and sell Cigarettes

  • Each firm’s goal: Maximize profit
  • The Players and the Goals
  • Two types of firm
    • Pizza firms make and sell Pizza

Profit = Ending $

slide3

= 1 Cigarette

Cigarette

= 1 Pizza

Pizza

= 1 dollar

$

Objects

slide4

Phases of Play

  • Goods market round
  • Non-smokers buy Pizza from Pizza firms for $.

Pizza

$

slide5

Phases of Play

  • Goods market round
  • Smokers buy Pizza from Pizza firms for $, and Cigarettes from Cigarette firms for $.

Cigarette

Pizza

$

slide6

Phases of Play

  • Goods market round
  • The catch: Second hand smoke is annoying to non- smokers.
  • Smoker #1’s second hand smoke annoys Non-smoker #1.
  • Smoker #2’s second hand smoke annoys Non-smoker #2.
  • Etc.
slide7

Phases of Play

  • Goods market round

Smokers

Utility = (Cigarettes + 1) (Pizza)

Non-smoker #1

Utility = Pizza –Smoker #1’sCigarettes

Non-smoker #2

Utility = Pizza –Smoker #2’s Cigarettes

etc. for all Non-smokers.

slide8

Utility and Profit Round

1. Non-smokers reportPizza purchased.

2. Smokers reportPizza and Cigarettes purchased.

3. Pizza firmsreport ending cash.

4. Cigarette firmsreport ending cash.

slide9

Trading Rules

Firms must remain in their seats.

Firms display cards indicating their ask prices.

Consumers may only purchase 1 unit of product at a time.

 Runner purchases one unit, takes it to manager, goes back and purchase another unit, etc.

 Manager calculates impact on utility of hiring one more product of each type.

slide11

Goods Market Round

Non-smokers buy Pizza for $.

Smokers buy Pizza and Cigarettes for $.

Non-smoker #n

Utility = Pizza –Smoker #n’sCigarettes

Smokers

Utility = (Cigarettes + 1) (Pizza)

slide12

Utility and Profit Round

1. Non-smokers reportPizza purchased.

2. Smokers reportPizza and Cigarettes purchased.

3. Pizza firmsreport ending cash.

4. Cigarette firmsreport ending cash.

slide13

New Rule

Non-smokers have successfully lobbied the government to outlaw smoking. Cigarette firms no longer exist.

slide15

Goods Market Round

Non-smokers buy Pizza for $.

Smokers buy Pizza and Cigarettes for $.

Non-smoker #n

Utility = Pizza

Smokers

Utility = Pizza

slide16

Utility and Profit Round

1. Non-smokers reportPizza purchased.

2. Smokers reportPizza purchased.

3. Pizza firmsreport ending cash.

slide17

New Rule

Smokers may purchase the right to smoke from Non-smokers.

= 1 smoking voucher (each)

1 smoking voucher entitles the smoker to smoke 1 cigarette.

slide18

New Rule

Smokers may purchase the right to smoke from Non-smokers.

Pizza

$

Smoker #1 may buy vouchersonly from Non-smoker #1.

Smoker #2 may buy vouchersonly from Non-smoker #2.

etc.

slide20

Goods Market Round

Non-smokers buy Pizza for $.

Smokers buy Pizza, Cigarettes, and vouchers for $.

Non-smoker #n

Utility = Pizza –Smoker #n’sCigarettes

Smokers

Utility = (Cigarettes + 1) (Pizza)

slide21

Utility and Profit Round

1. Non-smokers reportPizza purchased.

2. Smokers reportPizza,Cigarettes, and vouchers purchased.

3. Pizza firmsreport ending cash.

4. Cigarette firmsreport ending cash.

slide23

The experiment simulated three conditions

1. Undefined rights

 No one owned the air.

2. Non-transferable rights

 Non-smokers owned the air, but they could not sell the air to smokers.

3. Transferable rights

 Non-smokers owned the air and could sell the air to smokers.

slide31

Civil Society vs. Political Society

The appropriate role for government is the protection of rights.

In a political society, people also rely on the government to restrict rights of others for the common good.

In a civil society, people freely choose not to exercise their rights in mutual exchange.

slide32

Civil Society vs. Political Society

The problem with asking the government to restrict rights for the common good is that the government does not know what the appropriate level of restriction is.

When the government restricts markets, prices cannot emerge and so there are no value metrics on which to base decisions.

slide33

Civil Society vs. Political Society

Example

Government provided primary and secondary education.

Common good = “high test scores” (as a proxy for quality of education)

Problem #1: With no prices, the appropriate level of quality is unknowable (zero is as bad as infinity).

Problem #2: Without a profit motive, there is no incentive to find the drivers of quality education. Instead, incentive is to find the drivers of revenue.

slide34

Civil Society vs. Political Society

Question

With respect to public primary and secondary education, what drivers might impact educational quality?

Example: Student-teacher ratio

slide35

Student-teacher ratio has no apparent impact on NAEP scores.

Source: National Center for Education Statistics, U.S. Department of Education

slide36

School size has no apparent impact on NAEP scores.

Source: National Center for Education Statistics, U.S. Department of Education

slide37

Spending per Pupil has no apparent impact on NAEP scores.

Source: National Center for Education Statistics, U.S. Department of Education

slide38

Median Family Income has no apparent impact on NAEP scores.

Source: National Center for Education Statistics, U.S. Department of Education

slide39

Civil Society vs. Political Society

Maybe standardized test scores are the wrong proxy for quality.

What about the drop-out rate?

slide40

Spending per Pupil has no apparent impact on dropout rate.

Source: National Center for Education Statistics, U.S. Department of Education

slide41

Median Family Income has no apparent impact on dropout rate.

Source: National Center for Education Statistics, U.S. Department of Education

slide42

Civil Society vs. Political Society

Does aggregating data at the state level hide information?

What happens if we look at the school district level?

slide45

Civil Society vs. Political Society

Does nothing impact educational quality?

Performance is not random -- it is predictable.

slide46

For 8th grade, past NAEP scores predict future NAEP scores.

Source: National Center for Education Statistics, U.S. Department of Education

slide47

4th grade NAEP scores predict 8th grade NAEP scores.

Source: National Center for Education Statistics, U.S. Department of Education

slide48

Civil Society vs. Political Society

The fact that schools exhibit a consistency in performance indicates that performance is not random.

Performance drivers are unknown to the government because the government does not have the incentive and/or the ability to find them.

slide49

Civil Society vs. Political Society

  • The achievement of a civil society requires two things:
  • A set of laws and institutions that define and protect property rights.
  • The freedom to act in the market place free from government coercion.
slide50

Civil Society vs. Political Society

Without political freedom, economic freedom is unattainable. Without economic freedom, political freedom is meaningless.

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