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The Players and the Goals Two types of consumers Non-smokers (eat pizza). Smokers (eat pizza and smoke) Consumers’ goal: Maximize utility. Cigarette firms make and sell Cigarettes Each firm’s goal: Maximize profit. The Players and the Goals Two types of firm - PowerPoint PPT Presentation
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The Players and the Goals
Two types of consumers
• Non-smokers (eat pizza)
• Smokers (eat pizza and smoke)
Consumers’ goal: Maximize utility
The Players and the Goals
Two types of firm
• Pizza firms make and sell Pizza
• Cigarette firms make and sell Cigarettes
Each firm’s goal: Maximize profit
Profit = Ending $
Objects
= 1 Cigarette
= 1 Pizza
= 1 dollar
Pizza
$
Cigarette
Phases of Play
1.Goods market round
Non-smokers buy Pizza from Pizza firms for $.
Pizza
$
Phases of Play
1. Goods market round
Smokers buy Pizza from Pizza firms for $, and Cigarettes from Cigarette firms for $.
Pizza
$
Cigarette
Phases of Play
1. Goods market round
The catch: Second hand smoke is annoying to non- smokers.
Smoker #1’s second hand smoke annoys Non-smoker #1.
Smoker #2’s second hand smoke annoys Non-smoker #2.
Etc.
Phases of Play
1. Goods market round
Smokers
Utility = (Cigarettes + 1) (Pizza)
Non-smoker #1
Utility = Pizza – Smoker #1’s Cigarettes
Non-smoker #2
Utility = Pizza – Smoker #2’s Cigarettes
etc. for all Non-smokers.
Utility and Profit Round
1. Non-smokers report Pizza purchased.
2. Smokers report Pizza and Cigarettes purchased.
3. Pizza firms report ending cash.
4. Cigarette firms report ending cash.
Trading Rules
Firms must remain in their seats.
Firms display cards indicating their ask prices.
Consumers may only purchase 1 unit of product at a time.
Runner purchases one unit, takes it to manager, goes back and purchase another unit, etc.
Manager calculates impact on utility of hiring one more product of each type.
Ready to begin…
Goods Market Round
Non-smokers buy Pizza for $.
Smokers buy Pizza and Cigarettes for $.
Non-smoker #n
Utility = Pizza – Smoker #n’s Cigarettes
Smokers
Utility = (Cigarettes + 1) (Pizza)
Utility and Profit Round
1. Non-smokers report Pizza purchased.
2. Smokers report Pizza and Cigarettes purchased.
3. Pizza firms report ending cash.
4. Cigarette firms report ending cash.
New Rule
Non-smokers have successfully lobbied the government to outlaw smoking. Cigarette firms no longer exist.
Ready to begin…
Goods Market Round
Non-smokers buy Pizza for $.
Smokers buy Pizza and Cigarettes for $.
Non-smoker #n
Utility = Pizza
Smokers
Utility = Pizza
Utility and Profit Round
1. Non-smokers report Pizza purchased.
2. Smokers report Pizza purchased.
3. Pizza firms report ending cash.
New Rule
Smokers may purchase the right to smoke from Non-smokers.
= 1 smoking voucher (each)
1 smoking voucher entitles the smoker to smoke 1 cigarette.
New Rule
Smokers may purchase the right to smoke from Non-smokers.
Pizza
$
Smoker #1 may buy vouchers only from Non-smoker #1.
Smoker #2 may buy vouchers only from Non-smoker #2.
etc.
Ready to begin…
Goods Market Round
Non-smokers buy Pizza for $.
Smokers buy Pizza, Cigarettes, and vouchers for $.
Smokers
Utility = (Cigarettes + 1) (Pizza)
Non-smoker #n
Utility = Pizza – Smoker #n’s Cigarettes
Utility and Profit Round
1. Non-smokers report Pizza purchased.
2. Smokers report Pizza, Cigarettes, and vouchers purchased.
3. Pizza firms report ending cash.
4. Cigarette firms report ending cash.
Results…
The experiment simulated three conditions
1. Undefined rights
No one owned the air.
2. Non-transferable rights
Non-smokers owned the air, but they could not sell the air to smokers.
3. Transferable rights
Non-smokers owned the air and could sell the air to smokers.
Non-Smokers' Utilities
0
10
20
30
40
50
60N
on-S
mok
er #
1
Non
-Sm
oker
#2
Non
-Sm
oker
#3
Non
-Sm
oker
#4
Non
-Sm
oker
#5
Non
-Sm
oker
#6
Non
-Sm
oker
#7
Non
-Sm
oker
#8
Non
-Sm
oker
#9
Non
-Sm
oker
#10
Non
-Sm
oker
#11
Non
-Sm
oker
#12
Non
-Sm
oker
#13
Non
-Sm
oker
#14
Non
-Sm
oker
#15
Non
-Sm
oker
#16
Undefined Rights Non-transferable Rights Transferable Rights
Smokers' Utilities
0
5
10
15
20
25
30
35
Sm
oker
#1
Sm
oker
#2
Sm
oker
#3
Sm
oker
#4
Sm
oker
#5
Sm
oker
#6
Sm
oker
#7
Sm
oker
#8
Sm
oker
#9
Sm
oker
#10
Sm
oker
#11
Sm
oker
#12
Sm
oker
#13
Sm
oker
#14
Sm
oker
#15
Sm
oker
#16
Undefined Rights Non-transferable Rights Transferable Rights
Average Utility (smokers and non-smokers combined)
0
2
4
6
8
10
12
14
16
18
Und
efin
ed R
ight
s
Non
-tra
nsfe
rabl
eR
ight
s
Tra
nsfe
rabl
eR
ight
s
Pizza Consumed
0
100
200
300
400
500
600
Und
efin
ed R
ight
s
Non
-tra
nsfe
rabl
eR
ight
s
Tra
nsfe
rabl
eR
ight
s
Cigarettes Consumed
0
5
10
15
20
25
30
35
40
45
50
Und
efin
ed R
ight
s
Non
-tra
nsfe
rabl
eR
ight
s
Tra
nsfe
rabl
eR
ight
s
Price of Pizza
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Und
efin
ed R
ight
s
Non
-tra
nsfe
rabl
eR
ight
s
Tra
nsfe
rabl
eR
ight
s
Price of Cigarettes
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
Und
efin
ed R
ight
s
Non
-tra
nsfe
rabl
eR
ight
s
Tra
nsfe
rabl
eR
ight
s
Civil Society vs. Political Society
The appropriate role for government is the protection of rights.
In a political society, people also rely on the government to restrict rights of others for the common good.
In a civil society, people freely choose not to exercise their rights in mutual exchange.
Civil Society vs. Political Society
The problem with asking the government to restrict rights for the common good is that the government does not know what the appropriate level of restriction is.
When the government restricts markets, prices cannot emerge and so there are no value metrics on which to base decisions.
Civil Society vs. Political Society
Example
Government provided primary and secondary education.
Common good = “high test scores” (as a proxy for quality of education)
Problem #1: With no prices, the appropriate level of quality is unknowable (zero is as bad as infinity).
Problem #2: Without a profit motive, there is no incentive to find the drivers of quality education. Instead, incentive is to find the drivers of revenue.
Civil Society vs. Political Society
Question
With respect to public primary and secondary education, what drivers might impact educational quality?
Example: Student-teacher ratio
400
420
440
460
480
500
520
540
560
580
10 12 14 16 18 20 22 24
Student/Teacher Ratio, 2003
NA
EP
Sco
res,
200
3
8th Grade 4th Grade
Source: National Center for Education Statistics, U.S. Department of Education
Student-teacher ratio has no apparent impact on NAEP scores.
400
420
440
460
480
500
520
540
560
580
100 200 300 400 500 600 700 800
Student/School Ratio, 2003
NA
EP
Sco
res,
200
3
8th Grade 4th Grade
School size has no apparent impact on NAEP scores.
Source: National Center for Education Statistics, U.S. Department of Education
400
420
440
460
480
500
520
540
560
580
$2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $7,500
Instructional Spending per Pupil (2000$, State Cost of Living Adjusted), 2003
NA
EP
Sco
res,
200
3
8th Grade 4th Grade
Spending per Pupil has no apparent impact on NAEP scores.
Source: National Center for Education Statistics, U.S. Department of Education
400
420
440
460
480
500
520
540
560
580
$40,000 $45,000 $50,000 $55,000 $60,000 $65,000
Median Family Income (2000$, State Cost of Living Adjusted), 2000
NA
EP
Sco
res,
200
3
8th Grade 4th Grade
Median Family Income has no apparent impact on NAEP scores.
Source: National Center for Education Statistics, U.S. Department of Education
Civil Society vs. Political Society
Maybe standardized test scores are the wrong proxy for quality.
What about the drop-out rate?
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
$2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500
Instructional Spending per Pupil (2000$, State Cost of Living Adjusted), 2000
Dro
po
ut
Rat
e (G
rad
es 9
-12)
, 20
00Spending per Pupil has no apparent impact on dropout
rate.
Source: National Center for Education Statistics, U.S. Department of Education
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
40,000 45,000 50,000 55,000 60,000 65,000
Median Family Income (2000$, State Cost of Living Adjusted), 2000
Dro
po
ut
Rat
e (G
rad
es 9
-12)
, 20
00Median Family Income has no apparent impact on
dropout rate.
Source: National Center for Education Statistics, U.S. Department of Education
Civil Society vs. Political Society
Does aggregating data at the state level hide information?
What happens if we look at the school district level?
1190
1210
1230
1250
1270
1290
1310
1330
1350
0 5 10 15 20 25 30
Student-Teacher Ratio
BS
T 0
8 (M
an
d R
co
mb
ined
) (2
000)
Each dot represents one school district in Minnesota.
1100
1150
1200
1250
1300
1350
$5,000 $7,000 $9,000 $11,000 $13,000 $15,000 $17,000 $19,000 $21,000 $23,000 $25,000
Cost per Student
BS
T 0
8 (M
an
d R
co
mb
ined
) (2
000)
Spending per pupil has no apparent impact on test scores.
Civil Society vs. Political Society
Does nothing impact educational quality?
Performance is not random -- it is predictable.
500
510
520
530
540
550
560
500 510 520 530 540 550 560
8th Grade NAEP Scores, 1998
8th
Gra
de
NA
EP
Sco
res,
200
3For 8th grade, past NAEP scores predict future NAEP
scores.
Source: National Center for Education Statistics, U.S. Department of Education
510
515
520
525
530
535
540
545
550
555
560
420 430 440 450 460 470 480
4th Grade NAEP Scores, 2003
8th
Gra
de
NA
EP
Sco
res,
200
34th grade NAEP scores predict 8th grade NAEP
scores.
Source: National Center for Education Statistics, U.S. Department of Education
Civil Society vs. Political Society
The fact that schools exhibit a consistency in performance indicates that performance is not random.
Performance drivers are unknown to the government because the government does not have the incentive and/or the ability to find them.
Civil Society vs. Political Society
The achievement of a civil society requires two things:
1.A set of laws and institutions that define and protect property rights.
2.The freedom to act in the market place free from government coercion.
Civil Society vs. Political Society
Without political freedom, economic freedom is unattainable. Without economic freedom, political freedom is meaningless.