Review for the final Spring 2006

Iron law of public policy “For some businesses, profits increase when government acts; for others, profits falls…[E]very act of government no matter what is broader merits or demerits for society at large, creates winners and losers within the competitive sector of the economy.”

How the market works? What is Laissez-faire doctrine? The government should let the market rule the economy. Why? –Allocative efficiency, innovation, liberty But we need perfect competition

Market failure 1.Public goods 2.Externalities 3.Monopoly 4.Information asymmetry 5.Agent misdirection –Agents act on behalf of principals. client – attorney, shareholder - manager, citizen – bureaucrat. 6.Social goals 7.Inequality 8.Economic instability

Policy making in the United States Not unitary Policy-making systems “make” most public policy. These are networks of small, stable groups of people who control the operating decisions of specific government agencies of specific programs. They are called systems because they are predictable and involve a high level of interaction and feedback –The people: Elected: President, Congressmen, Senators Unelected: Lobbyists, professional staff, and full time bureaucrats

Corporate Governance mechanisms and strategies Owners (who act as investors) and managers who have fiduciary responsibility Mechanisms: –The stock market –Annual meetings –Board of directors Strategies (Hirschman) –Exit –Voice

Taxation Issues to consider –How visible are they? –How socially acceptable are they? –Progressive versus flat –Who pays? (how many people pays? Is payment connected to usage?) –What kind of Incentives on the economy and individuals? –How burdensome are they to administer for businesses?

Workers rights Employment at will governs the employment relation Limits (FLSA): Over the years the government has passed laws that have limited the rights of employers in this relation. Protections: Over the years the government has also passed laws that provide protection to employees. There has also been also legislation that has created exceptions: EEO

Consumer and workers safety Incentives: –Fear of litigation (tort system) –Fear of increase insurance cost (workers compensation) Direct regulation –Consumer protection agencies such as the FDA –Workers safety agencies such as the OSHA

Pollution and resource extraction: The tragedy of the commons The natural environment is not a public good because there is depletion when people use it. It is a negative externality. People who have not participated in the transaction gets hurt. It is also a common good in need of protection. People take much worse care of common than private goods.

Approaches to environmental protection Educate people to pollute less and to use less resources (environmental ethics). Problems: –Too complex (paper or plastic?) –Disenchantment –NIMBY Government intervention –Environmental Protection Agency (EPA) Since the 1970s It is very independent from business –Approaches Imposing direct limits on pollution Taxation and subsidies Incorporating the market

Glossary of terms to remember (definitions at the end of textbook) Allocative efficiency Board of directors Bona fide occupational qualification Common law Commons (common property resource) Compensatory damages Corporate social responsibility Credit rating agency “Deep pockets” or joint- and-several liability Discrimination Disparate impact Disparate treatment Distributive policy Due process Employment at will Excludability Externality Fiduciary

Glossary of terms to remember (definitions at the end of textbook) Free riding Interest groups Invisible hand Iron Law of public policy Issue or advocacy advertising Keynesian economics Laissez-faire Liberalism Macroeconomic policy Managerial revolution Market Market failure Market for corporate control Mercantilism Merit good Monopoly Negative externality or spillover cost Nonpoint source Opportunity cost

Glossary of terms to remember (definitions at the end of textbook) Principal-agent problem Private goods Privately held company Public goods Publicly held company Reasonable man Redistributive policy Rent seeking Resource depletion Separation of powers Shareholder resolution Statutory law Subsidy Think tank Tort Total liability Trade association Tragedy of the commons Transaction cost Unitary state Utilitarianism Workers compensation