The Microeconomics of Public Policy Analysis

(S = Supplementary Section, O = Optional Section with Calculus)
ALTERNATIVE COURSE DESIGNS xv
PREFACE xvii
ACKNOWLEDGMENTS xix
PART ONE: MICROECONOMIC MODELS FOR PUBLIC POLICY ANALYSIS
Chapter 1: Introduction to Microeconomic Policy Analysis 3
Policy Analysis and Resource Allocation 3
The Diverse Economic Activities of Governments 6
Policy-Making and the Roles of Microeconomic Policy Analysis 9
Organization of the Book 15
Conclusion 18
Chapter 2: An Introduction to Modeling: Demand, Supply, and Benefit-Cost Reasoning 19
Modeling: A Basic Tool of Microeconomic Policy Analysis 19
Demand, Supply, and Benefit-Cost Reasoning 25
Monday Morning, 6:45 A.M.
Monday Morning, 9:00 A.M.
Summary 33
Discussion Questions 35
Chapter 3: Utility Maximization, Efficiency, and Equity 36
A Model of Individual Resource Allocation 37
Efficiency 45
The General Concept
Efficiency with an Individualistic Interpretation
Efficiency in a Model of an Exchange Economy
A Geometric Representation of the Model
Relative Efficiency
Equity 58
Equality of Outcome Is One Concept of Equity
Equality of Opportunity Is Another Concept of Equity
Integrating Equity-Efficiency Evaluation in a Social Welfare Function (S)
Summary 66
Exercises 68
Appendix: Calculus Models of Consumer Exchange O 69
PART TWO: USING MODELS OF INDIVIDUAL CHOICE-MAKING IN POLICY ANALYSIS
Chapter 4: The Specification of Individual Choice Models for the Analysis of Welfare Programs 79
Standard Argument: In-Kind Welfare Transfers Are Inefficient 81
Responses to Income and Price Changes 85
Response to Income Changes
Response to Changes in a Good's Price
Response to Price Changes of Related Goods
Choice Restrictions Imposed by Policy 94
Food Stamp Choice Restriction: The Maximum Allotment
Food Stamp Choice Restriction: The Resale Prohibition
Public Housing Choice Restrictions S
Income Maintenance and Work Efforts
The Labor-Leisure Choice
Work Disincentives of Current Welfare Programs
The Earned Income Tax Credit (EITC)
Interdependent Preference Arguments: In-Kind Transfers May Be Efficient S 113
Summary 118
Exercises 120
Appendix: The Mathematics of Income and Substitution Effects O 121
Chapter 5: The Analysis of Equity Standards: An Intergovernmental Grant Application 124
Equity Objectives 124
Intergovernmental Grants 135
Design Features of a Grant Program 136
Income Effects and Nonmatching Grants
Price Effects and Matching Grants
The Role of Choice Restrictions
Alternative Specifications of Recipient Choice-Making
Equity in School Finance 146
The Equity Defects Identified in Serrano
The Design of Wealth-Neutral Systems
Other Issues of School Finance Equity
Summary 158
Exercises 160
Appendix: An Exercise in the Use of a Social Welfare Function as an Aid in Evaluating School Finance Policies O 162
Chapter 6: The Compensation Principle of Benefit-Cost Reasoning: Benefit Measures and Market Demands 169
The Compensation Principle of Relative Efficiency 171
The Purpose of a Relative Efficiency Standard
The Hicks-Kaldor Compensation Principle
Controversy over the Use of the Compensation Principle
Measuring Benefits and Costs: Market Statistics and Consumer Surplus 179
An Illustrative Application: Model Specification for Consumer Protection Legislation S 193
Problems with Measuring Individual Benefit S 197
Three Measures of Individual Welfare Change
Empirical Evidence: Large Differences among the Measures
Summary 208
Exercises 210
Appendix: Duality, the Cobb-Douglas Expenditure Function, and Measures of Individual Welfare O 212
Chapter 7: Uncertainty and Public Policy 220
Expected Value and Expected Utility 222
Risk Control and Risk-Shifting Mechanisms 235
Risk-Pooling and Risk-Spreading
Policy Aspects of Risk-Shifting and Risk Control
Alternative Models of Individual Behavior under Uncertainty 243
The Slumlord's Dilemma and Strategic Behavior
Bounded Rationality
Moral Hazard and Medical Care Insurance 254
Information Asymmetry and Hidden Action: The Savings and Loan Crisis of the 1980s and Involuntary Unemployment 260
Summary 263
Exercises 266
Appendix: Evaluating the Costs of Uncertainty 267
Chapter 8: Allocation over Time and Indexation 278
Intertemporal Allocation and Capital Markets 279
Individual Consumption Choice with Savings Opportunities
Individual Consumption Choice with Borrowing and Savings Opportunities
Individual Investment and Consumption Choices
The Demand and Supply of Resources for Investment
Individual Choices in Multiperiod Models
Choosing a Discount Rate
Uncertain Future Prices and Index Construction 299
Summary 307
Exercises 309
Appendix: Discounting over Continuous Intervals O 310
PART THREE: POLICY ASPECTS OF PRODUCTION AND SUPPLY DECISIONS
Chapter 9: The Cost Side of Policy Analysis: Technical Limits, Productive Possibilities, and Cost Concepts 317
Technical Possibilities and the Production Function 320
The Production Function Is a Summary of Technological Possibilities
Efficiency, Not Productivity, Is the Objective
Characterizing Different Production Functions
Costs 335
Social Opportunity Cost and Benefit-Cost Analysis
Accounting Cost and Private Opportunity Cost
An Application in a Benefit-Cost Analysis
Cost-Output Relations
Joint Costs and Peak-Load Pricing S
Summary 362
Exercises 363
Appendix: Duality-Some Mathematical Relations between Production and Cost Functions O 365
Chapter 10: Private Profit-Making Organizations: Objectives, Capabilities, and Policy Implications 373
The Concept of a Firm 374
The Private Profit-Maximizing Firm 377
Profit Maximization Requires that Marginal Revenue Equal Marginal Cost
The Profit-Maximizing Monopolist
Types of Monopolistic Price Discrimination
Normative Consequences of Price Discrimination
The Robinson-Patman Act and the Sherman Antitrust Act
Predicting Price Discrimination
Alternative Models of Organizational Objectives and Capabilities S 397
Objectives Other than Profit Maximization
Limited Maximization Capabilities
Summary 411
Exercises 414
Chapter 11: Public and Nonprofit Organizations: Objectives, Capabilities, and Policy Implications 417
Nonprofit Organizations: Models of Hospital Resource Allocation 419
Public Bureaus and Enterprises 429
Empirical Prediction of Public Enterprise Behavior: The Pricing Decisions of BART 432
A Normative Model of Public Enterprise Pricing: The Efficient Fare Structure 440
Summary 449
Exercises 450
Apppendix: The Mathematics of Ramsey Pricing O 452
PART FOUR: COMPETITIVE MARKETS AND PUBLIC POLICY INTERVENTIONS
Chapter 12: Efficiency, Distribution, and General Competitive Analysis: Consequences of Taxation 461
Economic Efficiency and General Competitive Equilibrium 462
Efficiency in an Economy with Production
Competitive Equilibrium in One Industry
The Twin Theorems Relating Competition and Efficiency
General Competitive Analysis and Efficiency 481
Partial Equilibrium Analysis: The Excise Tax
General Equilibrium Analysis: Perfect Competition and the Excise Tax
Lump-Sum Taxes Are Efficient and Most Real Taxes Are Inefficient
Summary 499
Exercises 500
Appendix: Derivation of the Competitive General Equilibrium Model 502
Chapter 13: The Control of Prices to Achieve Equity in Specific Markets 507
Price Support for Agriculture 508
Apartment Rent Control 514
Preview: Economic Justice and Economic Rent
Dissatisfaction with Market Pricing during Temporary Shortage of a Necessity
A Standard Explanation of the Inefficiency of Rent Control
Rent Control as the Control of Long-Run Economic Rent
The Relation between Rent Control and Capitalized Property Values
The Supply Responses to Rent Control
The Effects of Rent Control on Apartment Exchange
Recent Issues of Rent Control
A Windfall Profits Tax as Rent Control 542
Summary 544
Exercises 547
Chapter 14: Distributional Control with Rations and Vouchers 550
Ration Coupons 551
Vouchers and Ration-Vouchers 557
Rationing Military Service 561
The Utility Value of Work
Conscription versus the All-Volunteer Military
Income Effects of Rationing Methods S
Rationing Gasoline during a Shortage 572
Other Rationing Policies 583
Summary 586
Exercises 588
PART FIVE: SOURCES OF MARKET FAILURE AND INSTITUTIONAL CHOICE
Chapter 15: Allocative Difficulties in Markets and Governments 593
Market Failures 595
Limited Competition Owing to Scale and Scope Economies over the Relevant Range of Demand
Public Goods
Externalities
Imperfect Information
Second-Best Failures
Government Failures 606
Direct Democracy
Representative Democracy
Public Producers
Summary 613
Exercises 615
Chapter 16: The Problem of Public Goods 617
The Efficient Level of a Public Good 617
The Problem of Demand Revelation 619
The Housing Survey Example 621
Mechanisms of Demand Revelation 623
The Public Television Example 626
Summary 631
Exercises 633
Chapter 17: Externalities and Policies to Internalize Them 635
A Standard Critique of Air Pollution Control Efforts 637
The Coase Theorem 638
Efficient Organizational Design and the Degree of Centralized
Decision-Making 641
Reconsidering Methods for the Control of Air Pollution 647
Summary 657
Exercise 658
Chapter 18: Industry Regulation 660
Oligopoly and Natural Monopoly 661
Rate-of-Return Regulation 671
Franchise Bidding: The Case of Cable Television 677
Incentive Regulation 687
Summary 692
Exercise 695
Chapter 19: Policy Problems of Allocating Resources over Time 696
Perfectly Competitive and Actual Capital Markets 698
The Social Rate of Discount 700
Education as a Capital Investment 702
The Market Failures in Financing Higher Education Investments
Income-Contingent Loan Plans for Financing Higher Education
The Allocation of Natural Resources 707
Renewable Resources: Tree Models
A Note on Investment Time and Interest Rates: Switching and Reswitching
The Allocation of Exhaustible Resources Such as Oil
Summary 721
Exercises 723
Chapter 20: Imperfect Information and Institutional Choices 724
Asymmetric Information 725
Adverse Selection, Market Signals, and Discrimination in the Labor Market
Moral Hazard and Contracting
The Nonprofit Supplier as a Response to Moral Hazard
Nonprofit Organizations and the Delivery of Day-Care Services 734
The Value of Trust 746
Summary 747
Exercises 751
AUTHOR INDEX 753
SUBJECT INDEX 757