Policy Analysis & Market Models: A Comprehensive Guide
Policy Analysis
A process to evaluate policies and their impacts. This involves problem identification, exploring alternative solutions, establishing criteria for evaluation, and developing implementation plans.
Perfectly Competitive Market
A market model where many buyers and sellers trade identical products. This often leads to efficiency under certain conditions, benefiting society by maximizing total welfare.
Market Failures
These occur due to externalities, public goods, information asymmetry, and monopolies.
Government Failures
These arise when government interventions worsen outcomes due to inefficiency, corruption, or inadequate resources.
Congestion Pricing
Tolls that aim to reduce traffic congestion by charging higher fees during peak hours.
Rent Control
Economic critique argues that rent control distorts housing markets by reducing supply and quality. Potential social benefits include tenant protection.
Externalities
Negative Externalities
Examples include pollution and traffic.
Positive Externalities
Examples include education and vaccinations.
Public Goods
These are non-rivalrous and non-excludable, such as clean air.
Information Asymmetry
This occurs when one party has more information than the other (e.g., lemon cars).
Monopoly
A single seller with market power, leading to inefficiency.
Minimum Wage
Raises efficiency concerns due to potential job losses, but may be justified by social equity considerations.
Economic Efficiency
Kaldor-Hicks Efficiency
A policy is efficient if those who benefit can compensate those who lose.
Pareto Efficiency
No one can be made better off without making someone worse off.
Incrementalism
Policy changes occur in small steps, reducing risk but potentially missing bigger opportunities.
Policy Models
Market Models
Analyze supply and demand interactions, seeking equilibrium.
Production Models
Focus on system breakdowns and improving efficiency.
Conformity Models
Describe how individuals adopt behaviors from their environment (normative and informational influences).
Evolutionary Models
Describe change over time, driven by variation, selection, and retention.
Addressing Market Failures
Negative Externality
Overproduction harms society (e.g., pollution). Solution: Pigovian taxes to internalize social costs.
Positive Externality
Underproduction occurs due to unaccounted benefits (e.g., education). Solution: Subsidies to encourage production.
Public Goods
Non-rivalrous and non-excludable (e.g., street lighting). Solution: Government provision or subsidies.
Information Asymmetry
One party knows more than the other (e.g., healthcare). Solution: Regulation and transparency measures (e.g., labeling).
Elasticity
Measures responsiveness to changes in price.
Price Inelastic
Demand does not decrease significantly when prices rise (e.g., electricity).
Price Elastic
Demand decreases as prices rise (e.g., luxury goods).
Moral Hazard
When individuals take more risks because they don’t bear the full consequences (e.g., health insurance encourages riskier behavior).
Adverse Selection
High-risk individuals are more likely to engage in a transaction (e.g., in health insurance markets).
Oil Climate Index
Assesses the lifecycle carbon emissions of different types of oil, impacting policy decisions related to environmental regulation.
Perfect Competition
Many buyers and sellers with no control over prices, resulting in efficient market outcomes. Assumptions: Perfect information, no entry/exit barriers, zero transaction costs. Failure: Markets deviate from this ideal, causing inefficiencies.
Policy-Making Considerations
Incrementalism
Advocates for small, gradual changes in policy. Strengths: Reduces risks, easier to implement politically. Weaknesses: May not address urgent problems effectively.
Problem Definition
Tips (Bardach & Patashnik): Avoid embedding solutions in the problem statement. Use specific, quantifiable language (e.g., “too few public parks” rather than “lack of recreational spaces”).
Criteria for Policy Decisions
- Efficacy: How well the solution addresses the problem.
- Equity: Fair distribution of benefits and costs.
- Efficiency: Cost-effectiveness of the solution.
- Feasibility: Likelihood of successful implementation.
Type I Error
False positive (e.g., approving a drug that’s harmful).
Type II Error
False negative (e.g., rejecting a safe drug).
Additional Considerations
- Always consider “letting present trends continue undisturbed” as an alternative.
- Quantify problems and use specific, measurable criteria to assess alternatives.