EC 23 Reading and Problem Set Assignments

For class quiz next week, Sept. 15.

Please read the summary treatment in Schaum’s Outline on the Successive-Derivative Test for Optimization (4.6 on pp. 61-62).

Please also read the material on total, average, and marginal concepts in Schaum’s Outline (4.7-4.9 on pp. 62-64).

The quiz will include problem sets relating to the above.  Solved problems are illustrated in Schaum’s Outline (4.6-4.23 on pp. 67-79).




Pigou vs Coase, as refereed by Demsetz

This is a good summary of the Pigou vs. Coase debate on externalities. I have one comment: That the author should have brought Hayek into the picture. After all, the piece was published in 1996. What follows is a kind of executive summary.

Demsetz sees the debate on externality as one between two ideals: An ideal state (with perfect information) and an ideal market (also with perfect information and zero transaction cost). Taken to the limit, both models do not generally produce identical solutions. It is well known that the initial distribution of wealth and income affects market outcomes. Change that distribution and the economy rests somewhere else. With Pigovian state intervention, one also needs to factor in the initial distribution of wealth and income as a determinant of political process. Still, it is reasonable to imagine that both models arrive at the same end-point if they started with the same initial conditions.

Demsetz then concludes, based only on theoretical considerations, that the choice between the two models is one determined by preferences for freedom and the final (and/or initial) distribution of incomes and wealth.

Once we depart from the ideal to actual governments and markets, the choice between the two solutions would then have to take into account how much information there is (available) in the competing models, and how well they would reduce transaction cost. Here, Hayek would pronounce in favor of Coase, if only because Hayek believes that the market is more capable of ‘discovering’ such phenomena as efficient technologies and consumer preferences. Transaction cost can be seen as another form of externality, so we start to run the risk of arriving at a proverbial slippery slope.

Nonetheless, Demsetz is essentially right. Transaction cost is not at the kernel of Coase; and neither did Pigou ignore transaction cost. What was being debated was who should have the property rights to the externality, a question that economists usually avoid but one that Coase faced head on.

Progress and income inequality in PH

A recent Pew Research Center piece  has data on income inequality for various countries and the world.

The distribution of income in PH is as follows for 2011: 14% poor; 72% low-income; 14% middle to upper middle; and 0.2% high-income.

The global percentages are: 15% poor; 56% low-income; 22% middle to upper middle; and 7% high-income.

What might be concluded? We aren’t exactly poor, but we are predominantly low-income. That means the middle and high income groups are a minority of only 14%.

The economic challenge to those who claim they have a better mousetrap is whether they can reduce the low-income group to the global average of about 50%, raise the middle group to 30+%, while lowering the poor to 10% or below. Doable, but not easy, over the next decade.

Some (maybe strange) economics questions


1. Can economics say anything about unforeseeable (uninsurable) disasters? I’m thinking about the idea that a butterfly moving its wings can cause a global tsunami.

2. Will robots cause permanent unemployment? Rephrase this question. In ancient history, the nobility didn’t do the work because they had vassals and slaves. Were the nobles unemployed? Was that a bad thing? Is employment/underemployment/unemployment an issue of quality of life?

3. What exactly is poverty? If stray dogs are poor, and pet dogs are rich, is it good policy to control the population of stray dogs? Or is it better policy to have feeding stations for stray dogs? Or is it an even better policy to mandate that those who have pet dogs also feed the poor and hungry humans nearby? After all, we seem to always say that humans have rights that animals don’t.

EC 23 Mid-term Exam


Be sure you understand the three methods of solving a system of N linear equations: by ‘brute force’ or substitution; by finding the inverse of the matrix of coefficients; and by using determinants as per Cramer’s Rule.  Because the exam has limited time, you should go through the examples in the textbooks, and practice how to find the solution.

The exam question sheets should not be turned in with your blue books.  The questions are useful for class discussion, so please bring them with you for the class meetings after the exam.

Relax.  It’s only math.  It’s only economics.  It’s not the beginning or the end of the world.