What is this thing What readings discussed it What causes it What are its effects Think of examples and try to draw connections across items to see how concepts interrelate EXAM 1 STUDY GUIDE STATES MARKETS Consequences of government interaction in the market Easterly high inflation Israel example during wartime print more money Easy to start and hard to stop Money leads to efficient production Inflation tax on production Inflation leads to bad incentives for growth protect wealth instead of making new wealth high black market premium Jamaica example Govt keeps nominal exchange rate fixed during high inflation until it reaches high BMP high budget deficits Mexico example Redistribution with growth Poor enterprises rich individuals Floating exchange rate Create bad incentives for growth due to anticipation of higher taxes in the future inflation too much money not enough goods decreases value of money over time instability Kills banks that allocate credit for investments Negative real interest rate policy financial repression Reduced rate of innovation restricting free trade AKA closing the economy Protectionism Throw barriers in the way of imports to develop own industries Infant industry argument says learning curve in developing industry so no imports fostered learning Inefficient resource use lowers rate of return to investing in the future Openness in trade leads to growth lack of public services middle east area example Lack of public services leads to a bad return corruption excessive red tape regulations that kill private enterprise PEOPLE RESPOND TO INCENTIVES THESE REASONS ABOVE REDUCE INCENTIVE OF THE PEOPLE AND KILL GROWTH Government creates artificial barriers to entry to reduce competition and regulate the amount of people doing certain things Effects of market forces on policy making imprisons policy making and attempts to improve institutions and social world System of inducement cannot be commanded leads to auto punishment Change bad for performance lindblom changing institutions are punished Businesses do this through reforms that have bad effects on business unemployment bad economy leads to punishment which represses change automatic punishing recoil Inducement becomes the nub of auto punishment system Market seen as fixed variable Market incarcerates popular thought and professional thinking in social sciences Political elites vs market elites government controlled by commands market controlled by inducements Politicians are near sighted and pass their problems to the next guy lindblom easterly Mutual adjustment lindblom how morality is regulated Arises inconspicuously without a design ex the UN Figures newton Darwin adam smith freud Endlessly adapted Bones of the market system lindblom legal liberty of time and energy property rights quid pro quo bartering contingent offers of benefit to the other reduces injury money sales opportunities intermediaries sell to people who sell to people enterprises large webs collective corporations Burdened choice scarce burdened cost give something up for something else value of what is to be lost not always money lindblom Scarcity doesn t mean small amount but is a relationship between aspiration and availability To be efficient for whole society benefits burdens have to be weighed When costs are unknown decisions become irrational Allocative efficiency AKA efficient selection of enterprises Allocations always change Market allocates things that are scarce and have human control are obtained voluntarily Tradeoffs subjective values lindblom Technological efficiency is getting more output from a given input To produce more of one valued performance means putting up with some less than others To be efficient for whole society benefits burdens have to be weighed When costs are unknown decisions become irrational Decisions Made at the margin Efficiency prices change with values capital growth and technological change Puts things where they are valued the most tradeoffs Values are subjective Information plus incentives motivation efficiency Prices are determined by supply and demand People know their preferences and act in self interest People are motivated by self interest fear compulsion laws concerns about society and altruism Externalities unintended outcome imposed on outsiders by someone else making a decision Can be positive education vaccines or negative pollution 2nd hand smoke shlepse Can internalize through property rights regulation and taxation subsidies Cost must exceed gain Transaction costs measurement larger uncertainty larger cost asymmetries in knowledge policing monitoring enforcement fines etc great externalities North Observable dimension of institutional framework which is key to the economy Economic effects of property rights demsetz riker galliani value of property rights determine value of exchange Specify how people may be benefited harmed and who must pay whom Function of property rights is to internalize externalities Increased int Results from changes in economic values from new technology community preferences for private ownership Property as a mediating device collateral insurance Claim to land improves life More kids then more people to help you out Education benefits from secure home life so youll make riskier investments Credit leads to land ownership which leads to collateral State supply of property rights demsetz riker value of property rights determine value of exchange Specify how people may be benefited harmed and who must pay whom Function of property rights is to internalize externalities Emergence of new property rights is a response to the desires of the interacting persons for adjustment to new benefit cost possibilities problem is formal property rights are endogenous not random but based on wealth effort etc Non state protection of property lack of information uncertainty about enforcement illegal transactions 3rd party middle man connects people and makes assurances Gambetta need vulnerable clientele and it needs to be exclusive to be necessary and so people don t become independent Public goods non excludable and non rivalrous shlepse Market doesn t allocate public goods very well Joint supply Under supplied in general Shortcomings of the market system lindblom see random Common pool resource problems overuse problem free riding problem Overuse individually and becomes a problem for everyone Owned by everyone so no one is responsible shlepse Incentives to cheat berry No