Positive political economy
Economics, economic policy and public choice
This course introduces economics, economic policy and positive political economy to students completely new to the subject. The conversational yet precise style of this course is an excellent way of presenting the science of economics to tomorrow's policy makers and political analysts. The course is designed to provide students with a sound conceptual understanding of the subject using contemporary examples where possible. It stands out amongst all other introductory economics courses by stressing how public policy affects economic activity, and how economic considerations affect the decisions of policy makers.
The approach of this course is eminently positive, even when discussing normative questions, such as the debates about whether a lockdown should be enforced to combat an infectious desease, whether residential rents should be controlled in cities, or whether the VAT for food should be lowered. The positive approach of the course is grounded on two premises. On the one hand, there is no single public policy that will please everyone, i.e. there are always winners and losers from any given policy. On the other hand, policy makers do not need the support of everyone to be able to enact their public policies and stay in power, but just that of a certain winning coalition. Therefore, deriving a social welfare function is not only impossible from a scientific perspective, but also makes no sense whether you are a policy maker or a policy analyst. Consequently, in this course we do not try to promote a certain policy agenda, but turn instead those normative questions into positive ones. Why do some people favour and others oppose a lockdown to combat an infectious disease? Why do some people support rent controls and others oppose them? Why do some people favour the lowering of the VAT for food while others oppose it? Why do some leaders impose lockdowns? Why do some mayors impose rent controls in their cities? Why do some governments lower the VAT for food while others don't?
The course covers the most important topics in political economy while reflecting European economic structures and institutions and adapting the language and cultural references to a European audience. For instance, the euro is the basic currency referred to throughout the course, and case studies and examples largely refer to the European economy and EU policies. These features are apparent when dealing with the EU's common agricultural policy, external trade policy, competition policy, VAT, or monetary policy. By the end of the course, students should be able to understand the effects on markets of government policies such as a the establishment of a minimum price, a price ceiling, a quota, or a subsidy; the effects of taxation and the design of tax systems, monopolies, externatilies, public goods and ways to deal with them, macroeconomic data, economic growth, monetary policy, and fiscal policy. They should also be aware of the political conflicts related to economic policy and economic explanations of policy making. Last, but not least, they will also have developed general general analytical skills that can be transfered to further studies or non-academic careers. Weekly seminar questions and discussions on important topical issues will also encourage them to develop general managerial skills such as their ability to research independently, offer and receive peer review, and use group discussions to elucidate an issue.
1. Principles of positive political economy. The same government policy affects the welfare of different people differently. People act like rational economic actors in their political decisions. Economics, economic policy and public choice. Introduction to the scientific method. Why do people disagree about covid-19 restrictions? (Mankiw, ch. 1-2; Krugman, ch. 1-2). 2. Supply and demand. Quantity and price. Marginal utility and marginal cost. Movements along the curve vs curve shifts. The market equilibrium. Why is the current crisis different from the previous one? (Mankiw, ch. 4; Krugman, ch. 3). 3. Elasticity and its applications. Can a good harvest be bad news for farmers? (Mankiw, ch. 5; Krugman, ch. 5). 4. Supply, demand, and public policies. Price controls. Was it a good idea to raise the minimum wage in Spain in 2020? Is rent control a good idea for mayors? (Mankiw, ch. 6, pp. 111-120; Krugman, ch. 4). 5. The three effects of a tax: tax revenue, tax burden and the deadweight loss of taxation. Elasticity and tax incidence. Optimal tax systems: sufficiency, efficiency and equity. A reduced VAT rate for food? Reduced income tax for IT professionals? Are EU competition fines a tax on foreign big tech companies? (Mankiw, ch. 6: 120-128, ch. 8; Krugman, ch. 5). 6. International trade and protection. Tariffs. Quotas. Non-tariff barriers. Winners and losers from trade. Arguments for protection. How protectionist is the EU? Why is the UK tax on wine greater than the tax on beer? (Mankiw, ch. 3+9; Krugman, ch. 19). 7. Mid-term review. Welfare economics vs positive political economy. Pareto efficiency. Consumer surplus, producer surplus and tax revenue. Does it make sense to aggregate national well-being? (Mankiw, ch. 7). 8. Externalities. Pigouvian taxes, quotas and tradeable pollution permits. Rivalry and excludability: private goods, public goods and common resources. Club goods. What's the optimal size of our class? (Mankiw, ch. 10-11; Krugman, ch. 9). 9. Monopoly. The costs of monopoly. Economies of scale and natural monopolies. EU competition policy. Should the EU allow the creation of European champions? (Mankiw ch.15; Krugman, ch. 8). 10. Measuring the macroeconomy. Production, growth, employment, inflation, income distribution. Is Ireland the most developed country in the EU? (Mankiw, ch. 23-24; Krugman, ch. 11). 11. Economic growth. The Harrod-Domar model. The neoclassical growth model. Conditional convergence. Why does Romania grow faster than Germany? (Mankiw, ch. 25; Krugman, ch. 13). 12. Money and monetary policy. The monetary system. The money multiplier. Money growth and inflation. The inflation tax. Who creates money in Europe? The Covid-19 pandemic and a digital currency for the ECB? (Mankiw, ch. 29-30; Krugman, ch. 16-17). 13. Fiscal policy. The multiplier effect. Crowding out. Ricardian equivalence. How much is the government spending multiplier? The political business cycle: partisan and opportunistic. The Stability and Growth Pact. (Mankiw, ch. 33-34; Krugman, ch. 15). 14. Introduction to public choice. The median-voter theorem. The principal-agent problem. Exit, voice and loyalty.
Krugman, P. & Wells, R. (2019). Essentials of economics, 5th ed. New York: Worth; Mankiw, N. G. (2020). Principles of economics, 9th ed. Cengage learning.