Here’s a very curious story, of a man who chose prison so that he could gain access to health care. As the article itself describes, it is a testament to the very distorted incentives that US legislation imposes on its citizens. Economics is the study of how those incentives affect decisions, and public policy is the art of designing the incentives that would achieve socially desirable outcomes. And I think we can all be certain that having a man choosing prison in the way described in the article is not one such socially desirable outcome!

Of course, the economics of medical care is a dicey, complicated topic. The best that the economics profession has to offer in this matter is, most likely, an article Kenneth Arrow published in the American Economic Review in 1963. This article was chosen, in February 2011, as one of the 20 most important articles written in that Journal in its 100 years of existence.

Here’s what the American Economic Review’s Top 20 committee had to say about this article:

This paper provided a framework for thinking about the economics of the market for medical care using the language and tools of modern microeconomics. It argued that the aforementioned market is beset by market failures because consumers are exposed to risks that are not fully insurable (in large part due to problems of moral hazard), and because they lack the information and expertise required to assess risks and treatments. It hypothesized that various salient features of the institutions governing the provision of medical care are best understood as social adaptations aimed at redressing the resulting inefficiencies. It also noted that in some cases those institutional adaptations undermine competition and perversely contribute to inefficiency. Though written well prior to the emergence of the formal literature on asymmetric information, the paper anticipated many of the central issues that continue to occupy health economists today.

You can read the article in its entirety here.

A stimulating article that makes you think about the ways we can and cannot help, as economists, those who are the poorest among us.

Abhijit Banerjee and Esther Duflo, More Than 1 Billion People Are Hungry in the World, Foreign Policy, May/June 2011.

Contrary to common belief, Economics majors at Cal Poly need not choose a concentration. Many students now ask: What is a good course of study for people who want to have a general Economics major?

Economics majors at Cal Poly (and elsewhere) sometimes have a very hard time knowing how to structure their course of study as undergraduates. This post is designed to help you navigate the 2011-2013 Cal Poly course catalog to take maximum advantage of the many courses available for you to graduate at Poly with an excellent preparation in Microeconomics. What constitutes an excellent preparation? We’d say: One that would impress Hal Varian, who is the Chief Economics Officer at Google.

If you lean more towards Macroeconomics, we also have some advice for you.

Part I: What Everybody Should Do

1. Logistics

As mentioned above, “General” Economics majors do not need to declare a concentration but, after completing the ECON core, must:

• Complete at least 16 units of 400 level ECON electives, plus
• Complete at least 12 units of 300-400 level ECON electives, plus
• Complete any 20 units of university coursework at the 300-400 level

In other words: after completing the ECON core, you will need to take seven upper division ECON electives, plus five extra upper division electives (that can also be ECON but do not have to). Below you will find some suggestions for what those courses could be, if your interests lean towards Microeconomics.

If you’re not on the 2011-2013 catalog, we suggest you immediately switch to that catalog.

(Note:  What the 2011-2013 catalog refers to as “General Economics” was known in previous catalogs as “Independent Course of Study”).

One more thing: There is a lot of information presented below, and it may take several readings before you are able to fully digest it. Do know that this post is structured so that the most important advice comes earlier in the post.  Feel free to focus on the earlier parts of the post the first time you read it and leave the subsequent parts for later.

2. The Basics (I)

The first thing you need to do as a freshman is to make sure you are taking the right introductory Mathematics and Statistics classes. This boils down to the following:

• Instead of taking MATH 221 (Calculus for Business and Economics), take MATH 141 and 142 (Calculus I and II).
• Instead of taking STAT 251 and 252 (Statistical Inference for Management I and II), take STAT 301 and 302 (Statistics I and II).
• If you AP’d Calculus, or Statistics, use that as the basis for further study of mathematics and statistics. See below.

3. The Basics (II)

This is the 21st century. You need to have a basic understanding of how to program a computer. There are many ways you could accomplish this. Here are two examples:

• MATH 211 Computational Mathematics I, or
• CSC 235 Fundamentals of Computer Science for Scientists and Engineers I.

4. Upper Division Microeconomic Electives

The following upper division electives are eminently Microeconomics-based and are offered regularly.

1. ECON 403 Industrial Organization
2. ECON 404 International Trade Theory
3. ECON 408 Mathematical Economics
4. ECON 409 Probability Models for Economic Decisions
5. ECON 410 Public Finance and Cost Benefit Analysis
6. ECON 431 Environmental Economics
7. ECON 434 Urban Economics
8. ECON 435 Economics of Land and Water

(ECON 413 Labor Economics and ECON 432 Economics of Energy and Resources are also Microeconomics-based but are not offered regularly)

In completing your upper division ECON requirements you can, of course, take some Macro-based upper division electives as well.

5. Furthering your Mathematics preparation

A solid microeconomics training requires mathematics beyond that which is taught in a one or two quarter calculus sequence. Here’s how you can readily remedy this situation. In addition to completing MATH 141 and MATH 142, as suggested above, take (In order of importance):

• MATH 206  (Linear Algebra I) or MATH 244 (Linear Analysis I)
• MATH 143 (Calculus III)

6. Furthering your Statistics preparation

The future belongs to those who can successfully analyze and extract value from very large amounts of information. You need a strong background in Statistics to help get you there. In addition to completing STAT 301 and 302, as suggested above, take:

• STAT 425, 426 and 427 (Probability Theory, Estimation and Sampling Theory and Mathematical Statistics).
• MATH 248 Methods of Proof (It’s a required course for STAT 425) and STAT 325 Introduction to Probability Models (recommended before taking STAT 425).

I would say that this alone gives you plenty of options to give you a very solid training in Microeconomics. By the way, if you follow the advice we have given you so far you will be one course away from being able to pick up a Minor in Statistics. Not a bad deal. 

The sexy job in the next ten years will be statisticians. Because now we really do have essentially free and ubiquitous data. So the complementary factor is the ability to understand that data and extract value from it.

 -Hal Varian

But you can do even better than this, as there are a number of additional courses at Cal Poly that would really solidify your training both as a theoretical and an empirical economist. In any such case, we strongly suggest you read on.

Part II: The Next Level

7. Some more Math

Any Cal Poly Economics Major with interest in Microeconomics looking for more courses to take should seriously consider

• MATH 437 Game Theory.

If you are considering going into graduate school in Economics or Business, then you should also take, in addition to the above:

• MATH 412 and 413 (Introduction to Analysis I and II)

If you followed this extra advice you would also be one course away from being able to pick up a Minor in Mathematics. Not a bad deal either.

In ECON 311: Intermediate Microeconomics this week we ran the infamous auction the dollar experiment, which always brings amusement, and cash, to the auctioneer. It is an example of an all pay auction, where only one person gets the auctioned good, but more than one person pays. “All pay” auctions are not a theoretical curiosity: many situations in real life are in many respects an auction of this type. Examples include: sports tournaments, congressional lobbying, and making it in Hollywood. There are also some auction sites on the internet which implement all pay auctions. They’re called penny auctions, and how good or bad they are for their clients is open to debate.

Take a look at this article on them written by Richard Thaler, an Economics Professor at the University of Chicago Booth School of Business. He discusses their increasing popularity, and their potential pitfalls. Fascinating read but, as he himself concludes: Caveat emptor.

2. According to an article published on October 25, 2010 at the Wall Street Journal Economics majors have the highest starting salaries among liberal arts majors:

One could argue that this is simply due to the fact that economics majors simply choose more lucrative careers than other majors, but this is not true:  Economists make more money than other majors, even after controlling for occupations.

3. Economics provides an excellent preparation for individuals interested in becoming business leaders:  Economics ranked third among all majors with 9% of the CEOs of the S&P 500 companies in 2004 being undergraduate Economics majors. Incidentally, did you know that Warren Buffett, arguably the worlds’s most successful investor  was an Economics major and went on to subsequently complete a Masters degree in Economics from Columbia University?

4. Economics also provides an excellent preparation for individuals interested in going to Law school. Lawyers with degrees in economics earned $10,000 more per year than the average lawyer with another degree. One answer for this may be  found in the synergistic relationship between economics and law: Economics emphasizes analytical and problem-solving skills, and trains a person to think through problems in a systematic manner.  These are the very skills needed to succeed in a law career.

5. Economics is also very good at preparing you for civil and public service jobs worldwide.

6. David Colander, chair of the economics department at Middlebury College, wrote last year at the Chronicle of Higher Education about the appeal that the Economics Major has for so many undergraduate students.

He says that undergraduate students behave a bit like Goldilocks when choosing their majors. They sample courses from across the curriculum, searching for a “just right” blend of intellectual rigor, cutting-edge ideas, core skills, and broader understanding of the world. Increasingly, they are finding that ideal blend in the economics department. Prospective employers are happy to hire economics majors, who can think creatively and innovatively, communicate effectively, and handle quantitative analysis with ease.

7. In sum, if you’d like to understand how the world works, you’re analytically minded and want to be paid very well on top of it Economics may just be the major for you!

The St. Louis Fed is sponsoring a YouTube video contest. They want your original video, illustrating economic concepts concerning four factors of production: land, labor and capital resources and entrepreneurship.
The guidelines are simple. As an individual or as part of a team, you submit videos no more than five minutes in length that explain the four factors. The videos should be geared to a high school-aged audience. For more details go to this St. Louis Fed website.

What better way to make sure you know these basic concepts than to be able to successfully explain them to a bunch of teenagers? Want to try?

Just because a governmental program claims is good for the economy does not make it so: one must carefully consider its costs and benefits.

Here’s an example of that logic as applied to the recently implemented Cash for Clunkers program. It probably won’t be the last word on the subject, but it certainly does make you think.

Ed Glaeser, who is a Professor at Harvard’s Economics Department, thinks  it is.  He wrote a piece for the New York Times Economics Blog explaining Goolsbee’s contributions to Economics Research in plain terms.

Glaeser writes at the end of his piece:

Professor Goolsbee’s pregovernmental career was technically sophisticated but still grounded in the real world. His research shows a nuanced understanding of public policy that exaggerates neither the upside nor the downside of public action. He can apply the logic of economics in settings far from his core areas of scholarship – and on top of that, he is very, very funny.

The entire blog post is worth reading. You can find it here.

As you may know, this is a blog eminently used to supplement the teaching of Microeconomics at Cal Poly. As the Spring 2010 quarter just ended, the updating of this blog will resume in September 2010, as the Fall quarter begins.

See you then.

His argument can be illustrated through the box below:

.

This box exemplifies the two basic problems we face as a society in regards to the climate change conundrum. The first problem is that we truly don’t know which scenario, I or II, we live in, but we can’t wait until we’re one hundred percent sure that the catastrophe is coming to take corrective action because by that time it will be too late to do anything about it. It is a classic decision problem under uncertainty. Now, as in any such problem it is not necessary for our assessed probability of us being in scenario I to be very high for us to want to curb carbon emissions. It may be very unlikely that doomsday is coming, but if we deem that outcome highly unfavorable for us, we may want to take steps to avoid its most negative consequences, not unlike when people buy insurance for their homes even though most homes never ever burn. In other words, to first order, the climate change problem is an insurance problem and so it can be analyzed as such. This provides us with a framework for thinking about whether we should do something about it, and this is what Arrow does in his article.

The second problem is that  the costs and benefits of curbing carbon emissions occur at dramatically different points in time. To put it simply, the costs of curbing carbon emissions are borne by us, today, and the bulk of the benefits will be enjoyed by people that haven’t even been born yet. And the problem is that, other things equal, present societies do not routinely value the well-being of future generations as highly as they value their own (even though perhaps we ought to). In other words, part of what makes the problem dicey is that it is hard to determine what is the proper way to compare future and present wealth, especially when the comparison cuts across generations. In such case one must test how sensitive one’s conclusions about what to do depend on small changes in our assumptions (in this case, about the social discount rate). Arrow does performs sensitivity analysis on the discount rate and reaches the conclusion that even if we do discount the future heavily, the case for climate emissions control can still be made.

It is a brief piece which shows the power of sharp, clear-headed economics thinking about a topic that matters to us all greatly. Even if his analysis turns out to be wrong or incomplete, he performed a valuable service in helping us think about climate change in a systematic way.

More than a set of answers, Economics is a method for thinking about the social problems of the day. Sometimes the application of the method yields very conservative sounding answers (such as when Economists emphasize the importance of incentives, fiscal responsibility and the dangers of excessive taxation). Sometimes the very same method yields very liberal sounding answers (such as when Economists advocate the heavy regulation of markets for goods and services where the dangers of monopolization, moral hazard, or negative externalities, are pervasive). The power lies in the method, not in the answers.