1. Ag Policy, Lecture 2 Knutson 6 th Edition, Chapter 2 House Keeping –Roster –Seating Chart –Pictures –Tell me about you Name Major Hometown Where to eat in your hometown Career Plans Today –More Review of Economics Miscellaneous Economic Principles Role of Economics in Policy

2. Welfare Economics Consumer surplus (a) Producer surplus (b) Total Revenue (b + c) $ P 1 a b c D q 1 Q/yr s

3. Welfare Economics Important Assumptions –Equal Marginal Utility of a dollar for all consumers and producers –No Externalities $ P 1 a b c D q 1 Q/yr s

4. Welfare Economics Policy will often create a Deadweight Loss Example of a sales tax –Portion of Tax Paid by Consumers (Blue) –Portion of Tax Paid by Producers (Red) –Deadweight Loss (Black) $ P1P1 a b c D q1q1 Q/yr s P* - tax P* q*

5. Other Important Economic Principles Market Failures Fallacy of Composition Capitalization

6. Other Important Economic Principles Comparative Advantage

7. Other Important Economic Principles Macroeconomics –Fiscal Policy –Monetary Policy

8. Other Important Economic Principles Positive Economics Normative Economics

9. Other Important Economic Principles Pareto Superiority Pareto Optimality Compensation

10. Economists Role in Policy  Where do we find Policy Economist?  Academics/Education  Legislative Staff Economists  Executive Branch Economists  Political Staff Economist  Special Interest Staff Economists  Role of Economists  Unbiased Analyst  Objective view of problem/issue/situation  Once you take a position, you are labeled

11. Economists Role in Policy  Responsibilities in Policy Analysis  Be clear about what economics can and cannot do  Identify the winners and losers in a particular policy change  Illustrate all the consequences  Consider real world implementation issues in addition to theory  Evaluate compensation options

12. Approaches to Analysis Scientific approach Scientific method (define prob., review literature, formulate hypothesis, objective, draw conclusions) Like chemistry lab Analytical approach Consequences divided into pros and cons, advantages or disadvantages These tend to depend on person’s point of view Evangelistic approach Make case for cause and crusade for it Educational approach Alternatives and consequences

13. Disciplines in Policy/Program Development Economics Ethics Politics

14. Limits of Economic Analysis Economics is useful to –Explain/predict consequences –Quantify trade-offs between policies Economics can not quantify personal values –people associate different values with another dollar of: Government spending on Agriculture Taxes Collected Higher food prices –People differ on the value they place on: Clean air Food Safety Protecting Endangered Species Rural Development

15. Lecture 2, Wrap up Economics and Policy –What is the role of Economics/Economists in Policy? –Can you define and discuss intelligently the miscellaneous economic concepts as well as their importance to the policy process? –Can you explain the limits of economic analysis in the policy process? Next Class –Agriculture and the Forces of Change, Knutson Chapter 1