PPM 611

ECONOMICS AND PUBLIC POLICY

Syllabus and Study Guide

Charles S. Colgan

Office: 608 Law Home: 1 Karynel Drive
780-4008 South Portland, Maine 04106
email: csc@usm.maine.edu 741-9128
Fax: 741-9126
Fax: 780-4417

THIS CLASS NOW USES BLACKBOARD COURSE SOFTWARE. THE LATEST SYLLABUS AND COURSE INFORMATION IS AVAILABLE ONLY TO REGISTERED STUDENTS. THIS SYLLABUS IS PROVIDED AS A GUIDE TO THE COURSE.

Course Description

This course introduces the student to the basic concepts and analytical tools of microeconomics and demonstrates how these concepts are used in analyzing public policy problems and designing appropriate responses. Following an exposition of the basic theoretical and analytical concepts in a public policy context, the course examines the role and limitations of economics in public policy making using a case study. The course assumes little or no familiarity with economics; students who have taken undergraduate courses in microeconomics will generally find the public policy focus of the course useful.

Readings

William Baumol and Alan Bllinder Economics: Principles and Policy, 8^th Edition

Rhoads, Steven: The Economist's View of the World

Kennedy School of Government: Cost Benefit Analysis

Colgan, Charles: "Widening the Maine Turnpike" (downloadable from the course web site).

Assignments

Readings are assigned in the next section of the syllabus. Grades will be based on five written assignments. There will be three in-class quizzes on the dates indicated. Each quiz covers the material from the previous weeks as noted and each will take the first hour of class, with a lecture the second hour. A written assessment of the Turnpike case will be assigned the week before the case is to be discussed. There will be a take-home final handed out at the last class which must be returned within two weeks. The quizzes count for 10% each of the final grade; the Turnpike case paper counts 30% and the final paper counts for 40%. If you email your paper to me, please indicate in the body of the message what format it is in.

COURSE OUTLINE AND ASSIGNMENTS

1 August 31 Introduction to Course

Baumol and Blinder: Chapters 1 -3

2 September 14 Microeconomics 1 Demand & Supply

Baumol and Blinder Chapters 4-6

Rhoads, Chapters 1 & 2

3 September 21 Microeconomics 2 Production & Cost Baumol and Blinder, Chapters 7 & 8

Rhoads, Chapters 3 & 4

4 September 28 Microeconomics 3 Markets

1^st Quiz Available Baumol and Blinder, Chapters 9,10, 11

Optional: Chapter 12.

Rhoads, Chapter 5

5 October 5 Microeconomics 4 Market Failure

1st Quiz Due Baumol and Blinder, Chapters 13, 18-19

Rhoads, Chapter 7

6 October 19 Microeconomics 5 Public Goods and Externalities

Baumol and Blinder, Chapter 21

7 October 26 Microeconomics 6 The economics of responses to market

failures

Baumol and Blinder, Chapter 20

8 November 2 Macroeconomics 1 Measuring and Modeling

Baumol and Blinder, Chapters 22-24

9 November 9 Macroeconomics 2 Measuring and Modeling

Baumol and Blinder, Chapters 25-27

10 November 16 Macroeconomics 3 Government Policy and the Economy

Baumol and Blinder, 28-33

11. November 23 Macroeconomics 4 The Global Economy

Baumol and Blinder, Chapters 34-37

12 November 30 Cost Benefit Analysis

Kennedy School Case: Note on Cost-Benefit Analysis

Rhoads, Chapter 7 & 8

13 December 7 Widening the Maine Turnpike Case Study

Case Study Discussion

CASE STUDY PAPER DUE

ALL STUDENTS ARE EXPECTED TO ATTEND THIS CLASS

14 December 14 The Limits of Economics

Rhoads, Chapters 9 - 12

STUDY GUIDE TO ECONOMICS AND PUBLIC POLICY

Because this course covers a great deal of material, it is important that the student integrate material from the lectures and readings. The readings and lectures cover the same broad themes, but the level of detail in each varies from topic to topic. This study guide provides an overview of the broad themes discussed in each section of the course and indicates which sections of the readings require particular attention and which can be skipped. Students should consult the study guide routinely and develop a study plan. While every effort has been made to keep the assignments relatively even from week to week, the emphasis in the course is more on the microeconomics material and there is a rough balance between the readings and lectures. In the macroeconomic section of the course, more material is contained in the readings than in the lectures.

Another important element in the course is the Forum. This email discussion using the world wide web provides an opportunity for all students to ask questions about course material at any time and to have the answers posted for everyone to review. It is particularly useful for getting help while reading the text, reviewing material for exams or after class, or for asking questions on material covered in taped-only lectures. Because the Forum lists all questions and responses, it is also possible to see what other students have asked. Questions in class or by phone or in person are always welcome and encouraged, but the Forum should be used whenever possible since questions posted there benefit all students.

In the following table, B&B is the Baumol and Blinder text.

Week	Class Topics	Readings Notes
1	Introduction An overview of the topics and tools of economic analysis.	The first four chapters of B&B provide an overview of microeconomic and macroeconomic concepts that are elaborated on in the following sections. You should be comfortable with the various issues surrounding scarcity and choice as these play out at the micro and macro levels. These chapters also introduce a number of national economic issues. Some of these will be examined in more detail later. The lectures will add state and local detail. Pay particular attention to the appendix in Chapter 1 on graphs if you are not familiar with graphic representation of data. Graphs are used throughout the course and you will need to be comfortable with their use.
2	The Theory of Demand The relationship between price and quantity purchased. Introduction to the concept of elasticity (responsiveness).	In Chapter 5, read the appendix on indifference curve analysis. You will need to understand these concepts to follow the discussion of the substitution effect. You can skip the appendix in Chapter 6 on statistical analysis of demand relationships, though you may find this useful in the future.
3	The Theory of Production, Cost, and Supply Different approaches to measuring costs. Underlying economic principles of deciding how much to produce. The application of marginal analysis to determination of optimal levels of production and consumption.	There are several different types of curves that represent cost of production. The different concepts and the mathematical derivation of these curves is often confusing. Pay particular attention to the relationships between tables with data and the associated curves. Read the appendix to Chapter 7 on production indifference curves. Note how the use of this graphic analytic technique which was introduced in the study of demand can be used to examine a different set of issues.
4	Markets The structure and operation of market exchanges. The pre-requisite conditions for a competitive market. The advantages of markets for economic efficiency.	Like most economics textbooks, B&B discuss the market primarily in terms of private sector. This may not appear relevant to a course in public affairs, but: • many public services function in market-like arrangements and need to be understood in that context • public policies affect firms operating in market contexts. • examining the market alternatives to government policy means understanding markets The discussion of monopoly in Chapter 11 provides an important counterpoint to the discussion of competitive markets and also illustrates the economic principles that underlie the provision of many government services not subject to competitive or public policy pressures. Chapter 12 is optional. It provides a discussion of the behavior of firms in the real world market structures that lie between competition and monopoly. It is omitted as an assignment primarily to keep the readings within reasonable limits.
5	Market Failures Failures of market structure The peculiar market of health care	This class and the following two discuss the core economic principles behind most government actions. The section on the distribution of income is omitted because of space limitations within the course. Chapters 18 and 19 discusses regulation of industry. This topic will be briefly covered in class, and most detail will be in the reading
6	Market Failures continued. Equity and Efficiency failures associated with market externalities	Chapter 21 covers the economics of natural resources and the environment as an illustration of the principles of externalities. More detail on these concepts is provided in the lecture. The lectures and readings for weeks 6 and 7 may not match exactly.
7	Policies to deal with market failures and taxes Continuing discussion of externalities and public goods. Economic principles of taxation.	Chapter 20 covers issues related to taxation.
8	The Macroeconomy: Measuring and Modeling	Chapter 22 introduces the basic scope of macroeconomics. Pay particular attention to the patterns of economic growth and inflation in the U.S. that are discussed. You might also wish to review Chapter 2 for an overview of U.S. economic issues that will be analyzed using the conceptual tools of macroeconomics. Chapter 23 introduces the basic tradeoff in macroeconomics with which policymakers must grasp. These issues will be revisited later on. Be sure to read the Appendix to this chapter on price indexes and how to use them. Chapter 24 introduces the basic elements of aggregate demand analysis. This topic is continued next week and in chapters 25 and 26.
9	Macroeconomy (continued)	Continued discussion of the demand side view of the macroeconomy and introduction of the supply side. Introduction to fiscal policy.
10	Macroeconomic policy: Fiscal and Monetary The focus in class will be on recent federal policies to manage the national economy, what they are, and how they work.	The readings for this week are the longest in the course. You may wish to read some or all of these chapters ahead. Chapters 28 and 32 cover fiscal policy. You may wish to read them together. Chapters 29 to 31 cover monetary policy. It is very important that you read Chapter 29 carefully in order to understand how the banking system works and how monetary policy affects the economy. Chapter 33 returns to the unemployment/ inflation trade off to discuss the effects of policy outlined in the previous chapters
11	The Global Economy. The lecture will focus on the principle of comparative advantage, exchange rates and their role in the economy and on international trade policy.	Chapter 34 introduces the basic theory of international trade. This will expand on the material in class. Chapter 35 covers exchange rates. The chapter provides much more detail than will be covered in class. Chapters 36 and 37 link the discussion of trade policy to economic growth and to the underlying changes in productivity that determine long term economic success. These topics will not be covered extensively in class, but are important to understand the link between the national and international economies.
12	Cost Benefit Analysis The lecture will cover the basic elements of defining economic benefits and costs, or comparing them, and using them to make decisions.	The Kennedy School paper on cost benefit analysis provides a reference paper for the elements of cost benefit analysis.
13	Maine Turnpike Case ALL STUDENTS EXPECTED TO BE AT THIS CLASS	See Case Study Assignment attached.
14	The Limits of Economics The course has provided an overview of the many ways economics can be used. But there are limits to these uses. This class will wrap up any loose ends from previous classes and discuss issues where economics does not provide adequate guidance for public policy.	Rhoads provides many good criticisms of economics. These will be discussed in class to point out which ones are valid and which ones are not.

NOTE ON THE ASSIGNMENTS:

The written assignments in the class are designed to build skills in application of economic concepts to public affairs issues. The quizzes begin by asking about one or two concepts in each question. The case study paper requires application of a broad range of microeconomic concepts, but these are fairly well defined in the case and in the class on cost-benefit analysis. The final assignment requires application of a broad array of concepts, and you will have to select the most useful and appropriate ideas from throughout the course and successfully show how they contribute to understanding the policy problem given.

There are three quizzes. Each will require brief answers to up to 5 questions, selected from a list of at least seven. The questions will either ask for explanation of an economic concept or its application to a particular problem. The questions are designed to elicit an understanding of key ideas from the class or the readings. Graphs will not be required, though they may be useful in explaining answers. No math will be required beyond basic arithmetic.

The case study assignment allows for a more extensive discussion of the economic concepts underlying a public policy controversy. It requires application of the material from the discussion of cost benefit analysis and from the sections of the course on microeconomics.

The final assignment will be a paper of the same type as the Turnpike case study, but it will be on a broader topic. Students will have a choice of topics upon which to write. The assignment will require that elements of both macroeconomic and microeconomic analysis be used.

Grades on all assignments will be based primarily on how well the concept is explained or applied and, in the larger papers, on your choice of which economic ideas are most important in understanding the policy problem. Writing is not graded in this course, but clearly and concisely written papers are always a help in making yourself understood.

PPM 611

Case Study Assignment

The Maine Turnpike case describes the analyses that were done by various groups in support of, or opposition to, the decision to widen the Turnpike during the 1980's. Based on the material covered in the course so far, please prepare a critique of the studies done. In your critique you should consider the following questions:

What are the relevant economic issues raised by the proposal to widen the Turnpike? That is, how can economic analysis help frame the issue and provide an answer as to whether widening the turnpike is a good idea or not? The following economic concepts may help in your discussion (All of these are relevant, but not all are equally relevant; your job is to figure out which are the most relevant and explain why.)

Cost-benefit analysis

Efficiency and Equity

Market failure

How are those issues addressed (what methods, data, etc.) by the various studies of the Turnpike? Is there other data that could be or should be used?

You should also indicate whether, on the basis of the economic factors alone, you would recommend approval of the Turnpike widening, recommend disapproval, or recommend that more studies be done. You must clearly state the rationale and evidence for your recommendation, and, if you choose option 3 (more study) indicate what economic issues you feel should be addressed in the additional study and any suggestions you have for how such issues might be addressed in a study.

You should assume that the reader is already familiar with the substance of each of these studies, so there is no need to recapitulate major points from the cases. Concentrate your discussion on the economic issues noted above.

Your paper should be prepared in "policy memo" format. That is, pretend that you are writing to a decision maker (say the Governor), summarizing for him or her the relevant information about the Turnpike widening and presenting your recommendation. You should summarize the issues, not regurgitate the studies (assume the governor has read the studies already). Assume also that the governor was once an economics professor and will only be impressed with your work if it shows a clear understanding of economic concepts and theories and how these might apply to this particular case.

Note that a good policy memo is written so that the conclusions are presented up front, and supporting evidence is then presented. The paper should be about 5-7 pp. (double spaced).