Public Policy Midterm I: Flashcards

By Vanessa Sochat

What is public policy?

An action by government that affects public

welfare

What is analysis, and what are the four main

components of analysis?

Analysis is breaking a problem into its parts, or

components.

Four parts are: Description

Explanation

Prediction

Prescription

What are the elements of policy analysis?

• Define the problem

• Identify Policy Options

• Predict consequences

• Value outcomes

• Recommend Policy

What is game theory?

game theory is a way of understanding

collective behavior of individuals in collective

setting. Figure out individual incentives, and let

everyone loose, and see what happens!

What are the three main types of games?

o Coordination Games

o Competitive Games

o Mixed-motive games

How do we solve coordination games?

o Communication

o Conventions

o Focal Points

What are examples of competitive games?

o Odds and Evens

o Chess and other parlor games

o Battle of Bismarck Sea

What is a maxi-min strategy?

the strategy with the best “worst”

outcome. We want to maximize the worst

possible outcome, or minimize the damage.

We opt for strategy that avoids worst possible

outcome

What is a dominant vs dominated strategy?

• A strategy is dominant if it does better than

all other strategies in at least one

circumstance and as well as every other

strategy in all circumstances (never loses)

• a strategy is dominated by another if it

does worse in at least one circumstance

and no better in all (never wins

What defines an equilibrium?

an outcome is in equilibrium if no party

regrets its choice of strategy, no player has

incentive to move away, no player regrets his

or her choice.

Ask if either player would want to switch out of

situation if they could, without moving other

player’s choice

What defines a prisoner’s dilemma?

There is a dominant strategy which leads to a

pareto inefficient point

What defines a mixed motive game?

• Variable-Sum

• Coordination Elements

• Competitive Elements

What is the purpose of a policy memorandum?

• provides busy policymakers with

information they need to do their jobs

• breads down complex issues into essential

facts

• evaluates alternative courses of action

• provides recommendations for action

What does the prisoner’s dilemma look like

(draw it in normal form)

Define pareto efficiency

• An outcome is Pareto efficient if it is not

possible to make one party better off

without hurting another player

• An outcome is Pareto inefficient if one (or

more) party can be made better off without

hurting another

How could we solve the prisoner’s dilemma?

• Contracting

• Communication

• Detecting Cheating

• Punishing Defection

• Trust

• Iteration (play again and again to learn

from the experience)

Issue Linkage (punishments, change the game)

What are some elements of a repeated game?

• Rounds

• Strategy in the shadow of the future: taking

into account today what payoffs might

follow from this decision in the future

• Reputation and trust: are very important.

Desired reputation depends on what game

you are playing (as nice and trustworthy,

irrational in Chicken , etc)

What are the rules of Tit for Tat, and what was

it?

• Rules

Start by cooperating. After that, copy what the

other player did in the last round

• Was a computer program/algorithm

entered in contest against others

What kind of “game” is the problem of global

warming?

• Multi party prisoner’s dilemma

If everyone reduces equally, then benefits

outweigh costs

if you are only country to reduce, costs

outweigh benefits

if you are only country not to reduce, benefits

are a LOT greater costs

• Dominant strategy is to defect, or free-ride,

so we have collective action failure

Discuss the argument for and against markets

and government intervention

Pro Market Position: markets are efficient

Governments are wasteful and (sometimes) don’t

act in the public interest

Pro Government Position: markets are unfair

and sometimes inefficient. Governments act in the

public interest

What is a market?

An institution for coordinating voluntary

exchange between individuals

Why are markets appealing?

• coordinates production and consumption

• Efficient

• The “invisible hand”

o Voluntary

o Automatic

individual interests � public interest

What are determinants of demand?

• income

• tastes

• complementary goods

• Other goods

o Prices

o Substitutability

When would we intervene in a market?

Some people can’t pay for certain product

Something isn’t equitable

If market is immoral (prostitution)

Positive/negative externalities

Wages

Where do we commonly see market failures?

• Public Goods

• Externalities

• Market Power (monopoly, cartels)

Imperfect information

What is a public good?

low “rivalry” in consumption (zero marginal

cost of production)

(often) impossibility of exclusion

Non-rivalrous and nonexcludable!

What are examples of public goods?

• fighting global warming

• national defense

• clean air

• concert

• park

• voting

What defines a common pool good?

• rivalrous and non-excludable

(think of tragedy of the commons and

freeways)

There is incentive to freeride � overuse

What is the main problem with public goods?

Collective Action for a Public Good is a Multi-

party Prisoner’s Dilemma

How might we solve collective action failures?

• Negotiations

o Cheating

o Enforcement

• Government

• Privatization

• Social Norms –attach public stigma,

encourage behavior, give sticker to vote!

What is an externality?

What is a network externality?

a positive consumption externality

As more people join the network, the network

increases in value.

How do we solve externalities?

• regulation

• Incentives (internalizing the Externality)

o Tax

o Subsidize

• Negotiated compensation: winners pay

losers

State Coase’s Theorum

Says that…

It doesn’t matter who is doing paying… if

property rights are well assigned in advance, then

parties can negotiate amongst themselves and

come up with solutions!

What are the requirements of Coase’s

Theorum? (for it to work)

Requirements:

• property rights are well defined

• people act rationally

• transaction costs are minimal

What is negotiation?

• To arrange or settle by discussion and

mutual agreement

• A mixed motive game with communication

• It is difficult to negotiate where neither will

trust (Samuel Johnson)

What is negotiation analysis?

• technique for modeling negotiations

• predict range of possible outcomes

• inform strategies for effective negotiation

• it is a science and an art

What are the elements of negotiation analysis?

• parties

• issues

• interests

• alternatives to agreement

• zones of possible agreement

How do you define interests in negotiations,

and what are the three types?

• preferences with respect to issue

outcomes, some idea of what they want

out of negotiation, inherent to them

• competing interests

• complementary interests

• convergent interests

What does BATNA mean?

Best Alternative to Negotiated Agreement!

(if no agreement is reached)

What does ZOPA mean?

Zone of Possible Agreement

(between the buyer and seller’s reservation

values)

outcomes better than BATNA’s are possible

for agreement (ZOPA) is this zone

Location of reservation values define a

Zone Of Possible Agreement (ZOPA)

What are other questions to consider for a

negotiation?

Are threats possible?

What are the norms?

Is third party intervention possible?

Are there time constraints?

Are the contracts binding?

Are negotiations private or public?

What is the value space?

The surplus that buyer/seller gets as a result of

the agreement, plotted on the x/y axis

What are elements of distributive bargaining?

leaning and influencing (divvy up fixed good or

value)

Anchoring and framing (First offers) the first

offer frames the negotiation, and matters!

Commitment (Patterns of Concession)

The EndGame

Ethics

Talk about benefits and risks of framing high

and low in issue space, from perspective of buyer

and seller.

ISSUE SPACE. Framing High: pushed in favor of

the seller, seller first offer is high. Risk of going too

high and having other person think you are

ridiculous

Framing Low: pushed in favor of buyer.

Define multi-issue negotiations in context of

one issue negotiations

• one issue negotiations are largely about

dividing a fixed pie

• multi issue negotiations are about baking a

bigger pie (and dividing it)

Define integrative versus distributive

bargaining

Integrative bargaining: we push out together

But we also have to worry about distributive

bargaining, diving between two parties (sideways

arrow)

What are tactics for creating value in

integrative bargaining?

o Sharing information

o Joint Problem Solving

What are the barriers to effective integrative

bargaining?

lack of information

• complexity

• Mistrust

• “claiming” behavior

o Misinformation

o Commitments

o We cling as much value as we can

for ourselves without thinking

about expanding frontier

What is the negotiators dilemma?

(draw it in normal form – what is it like?)

• The choice: create or claim value

What are rationales for government to take

action?

• public goods (non excludable and non-

rivalrous)

• Externalities

• Negotiation Failures

o Mistrust

o Lack of communication

o High transaction costs

o Complexity

o Claiming behavior

• inequalities or other value violations

What are five “modes” of government?

• direct provision of goods or services

• market perfecting (or improving)

• regulation

• negotiation facilitation

• redistribution

Define direct provision

• pure public goods such as Defense

• “tax and spend” may be pareto improving

• Problem: imperfect public goods (it isn’t

clear they actually exist)

• Examples: Location-specific goods: a

national park?

People that live closer can benefit more

Group specific goods: NEA? PBS?

Define market perfecting

• Taxes or subsidies

• Aligning private costs and benefits with

social costs and benefits

• Examples

o Gasoline taxes

o Research subsidies (or tax breaks)

• Issues

o how much is enough?

o Income and distribution effects

Define regulation

• restricting private actions not in the “Public

interest”

• Examples

o Driver’s licenses

o Drinking age

How does the government facilitate

negotiation?

• contract enforcement

• judicial system is government’s way or

trying to enforce contracts

• Mediation: get two sides to come to

agreement

• Arbitration: parties both agree that YOU

come up with solution

What are three rationales for redistribution?

o Initial endowments

o Unfair processes

o “lumpy” prizes

What are three policies of redistribution?

o Progressive taxation: you pay more

if you earn more

o Social insurance (persons with

higher income less eligible for

benefits, Medicare)

o Affirmative action

What are the three options to represent the

public interest?

Pareto principle

Voting

Potential compensation

What is the argument for/against the Pareto

principle?

If everyone is at least well off, then there is no

question that social welfare has improved

Limits to the Pareto Principle

o Rarely do policies allow a pareto

comparison

o Usually, someone is better off,

someone worse

Is the sacrifice of one person worth the benefit

of others? When do we allow tradeoffs?

What are arguments for/against voting?

voting to reveal welfare

individuals judge their own

interests

majority may be better off

Issues

does not measure strength of preferences

Voting does not guarantee a unique

“winner” (Arrow’s impossibility theorem)

“Tyranny” of the majority

Describe potential compensation

If we could pay the losers from the gains of the

winners then the policy is a kaldor hicks

improvement

Government favors groups that get them

elected!

• Social Benefit Cost Analysis: employs

potential compensation criterion

• Does not address equity questions