Public Goods

LECTURE 1
FUNDAMENTAL CONCEPTS IN ECONOMICS

DR. RACHEL SHAFER THURSTON

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What do you think is going
on in this cartoon?

Think of how you might caption it.

PLAN FOR TODAY

Overview of

Course

Scope:

What is an
economy?

Motivation:
Why learn
economics?

Logistics and

Policies

Activities

Grading

Schedule

Introduce
Three Key
Concepts

Scarcity

Opportunity

Cost

Incentives

In-class

Experiment

“Ultimatum

Game”

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OVERVIEW OF COURSE

“An economy is simply some type of organization that produces goods and
services and then allocates those goods and services to its members.

 Economies can be small organizations, such as households, whose job might

be to grow a garden to produce vegetables…

 Economies can be big organizations, too, like the United States, the

European Union, or the Pacific Rim, each of which produces hundreds of
thousands of different goods and services.”

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OUR FOCUS: ANALYZING SOCIAL ISSUES

Our Text: “Economic Analysis of Social Issues” v 2.0 by Alan Grant

Topics Include:


Cost Benefit Analysis and the Value of a Life


International Trade


Pollution


Health Insurance and Health Care


Discrimination


Minimum Wage


Bitcoin

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WHY STUDY ECONOMICS?

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MAKE

BETTER

CHOICES

SATISFY

YOUR

CURIOSITY

Source

ADVANCE

YOUR

CAREER

“To the degree you

like science,

engineering and

economics

, pick as

much of that as you

have an appetite for

because those are

the

agents of

change for all

institutions

.”

Source:

David Roth Interview

CHANGE THE WORLD

CHANGE

THE

WORLD

“Markets change people’s

behavior…

Market

design

is about understanding and

facilitating that very human

process of how we

coordinate with other

people

.”

Alvin

Roth

(

Source

)

LOGISTICS AND POLICIES

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PARTICIPATION

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CLASSROOM DEBATES

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“LAB BOOK”

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CHAPTER QUIZZES

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IN-CLASS EXAMS

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GRADES

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QUESTIONS?

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KEY CONCEPTS

SCARCITY

OPPORTUNITY COST

INCENTIVES

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Scarcity means that we don’t have the
resources necessary to fulfill all of our
wants.

Notice that this definition refers not to the
absolute quantity of the resources, but
compares that quantity to human wants.

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Scarcity means that we don’t have the
resources necessary to fulfill all of our
wants.

Scarcity is a reality not only for rare or
unique items, but for any good whose
production or consumption involves
tradeoffs

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Opportunity Cost is the value of the
next-best alternative to a choice.

When scarcity creates a tradeoff between options, the
consequence is that choosing one option requires that we
give up the opportunity to do other things with our
resources – not only our money, but also our time, our
attention, any other resources involved in the choice.

Awareness of opportunity cost can remind us to take into
account not only the explicit costs of a choice, but also the
implicit costs.

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EXAMPLE

A student spends

three hours and $20

at the movies

the night before an exam.

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Opportunity Cost is the value of the
next-best alternative to a choice.

It makes sense to take into account the
next-best alternative to a choice because

“Choosing Is Refusing”

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EXAMPLE

A farmer chooses to plant a field with wheat

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EXAMPLE

A commuter takes the train
to work instead of driving.
It takes 70 minutes on the
train, while driving takes

40 minutes.

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People respond to
incentives

• Economists usually assume that each person tends to

select the option that he or she believes is
“best” out of all of the options available to him
or her.

• Not everyone will prioritize the same things, because

people have different preferences.

• Although decision-makers sometimes lack information

or miscalculate, it is risky to count on them to
consistently choose what is against their own self-
interest.

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People respond to
incentives

If an option’s benefit increases, or
its cost decreases, more people
are likely to choose that option.
If an option’s benefit decreases, or
its cost increases, fewer people
are likely to choose that option.
Therefore, we must be careful
about the incentives we create!

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“The unintended

effects of
incentives:

An experiment to get
kids eating healthy

shows how theories can
miss key nuances in the

real world.”

MORE ABOUT THE EXPERIMENT

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IMPLEMENTATION OF INCENTIVES MATTERS

“Incentives aimed at convincing kids to choose a
healthy snack worked. The more kids who were
offered incentives, the more ended up choosing
grapes. But when everyone could see who was
getting the incentive, there was a point at which it
started to backfire. The chart below shows that,
when they were kept private (the light gray line),
then the share of kids who chose grapes steadily
increased. But when public (black line), there was a
point at which kids started going in the opposite
direction and chose cookies.”

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“We have all these interesting insights

about human behavior and the function of markets
and incentives that come from economic theory,
but then the implementation is as important as

understanding the principle.”

Manuela Angelucci, coauthor of Incentives and Unintended
Consequences: Spillover Effects in Food Choice and Assistant
Professor of Economics at University of Texas - Austin

IN-CLASS EXPERIMENT

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“The Ultimatum Game”

This game is played in pairs. Each pair has two roles:

• The “allocator.”
• The “receiver.”

You will get the chance to play both roles.
Your game choices will be anonymous.

IN-CLASS EXPERIMENT

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• The “allocator” gets to propose the

split. They “send” some amount
between $0 and $1,000 to the
receiver, and keep the rest.

• The “receiver” gets to accept or reject

the offer.

The situation: $1,000 must be split between the allocator and
receiver.

IN-CLASS EXPERIMENT

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The outcome:

• If the receiver accepted the

allocator’s proposal, then each player
gets the amount that was proposed by
the allocator.

• If the receiver rejected the allocator’s

proposal, then neither player gets
anything.

IN-CLASS EXPERIMENT

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•

Alice proposes the following:

“My name is Alice and I offer the receiver $300”

•

Bob now can choose to accept (and get $300) or
reject (and get nothing).

•

Bob accepts.

•

Alice gets $700 and Bob gets $300.

Example 1:
Alice is the allocator and Bob is the receiver.

IN-CLASS EXPERIMENT

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•

Charlie proposes the following:
“My name is Charlie and I offer the receiver $450”

•

Della now can choose to accept (and get $300) or
reject (and get nothing).

•

Della rejects.

•

Charlie gets $0 and Della gets $0.

Example 2:
Charlie is the allocator and Della is the receiver.

RECAP

Scarcity

• Scarcity means that we do not have the resources necessary to fulfill all our wants
• Scarcity is a reality not only for rare or unique items, but for any good whose production or

consumption involves tradeoffs

Opportunity

Cost

• The opportunity cost of one option is the value of the next-best option, because “choosing is refusing”
• Understanding opportunity cost can empower you to make better decisions

Incentives

• People respond to incentives
• When we change rules and rewards, it may change people’s behavior
• An economy may be more or less successful depending on how well it incentivizes beneficial choices

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YOUR NEXT STEPS

To Be Prepared for the Semester:

 Check out our Canvas course page

 Read our syllabus and take note of

assignment and exam dates

 Purchase the textbook

 Post any questions you have on Canvas

General Questions Discussion Board

To Master Today’s Material:

 Read Chapter 1 in your textbook

 Practice taking the Chapter 1 Quiz

(available starting tomorrow)

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NEXT TIME

Chapter 2: Cost Benefit
Analysis and the Value
of a Life

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