Graduate Microeconomics II

Economics 7006

David Kiefer
telephone 581-7481
e-mail: kiefer@economics.utah.edu

This second course in the graduate microeconomics sequence leans heavily on the first. The competitive equilibrium provides a benchmark, and welfare economics provides a normative methodology. We extend the discussion of an idealized economy of utility maximizing consumers and profit maximizing producers to consider cases of market failure.

Situations where the market fails to achieve Pareto efficiency provide a rationale for government intervention. Market power is a classic failure. The competitive equilibrium differs from that of monopoly or oligopoly. (The latter case motivates a digression into game theory.) Other failures are associated with public goods, environmental damages, and social insurance. We also think of income inequality as a market failure. In all cases we use the competitive benchmark to measure the costs, and to design appropriate public policy.

Finally, we turn to social choice theory for a discussion of democracy. The median voter model provides a benchmark for the analysis of the political equilibrium, analogous to economic equilibrium. We discuss the conditions under which a majority will support intervention to correct for the public goods failure discussed above. We also consider alternative voting rules.

The required textbook is Hal R. Varian, Microeconomic Analysis, third edition.

The grading scheme is:

· Homework assignments 20%,

· Midterm examination 35%,

· Final examination 45%.

As a general rule I do not give incomplete grades. Late assignments lose points; copies and exact duplicates are unacceptable. Exams must be taken at the scheduled time.

Topic Outline and Reading List

1. Welfare economics and market failures

Varian, Analysis, chapters 17

2. Monopoly

Varian, Analysis, chapters 14

(optional) Oi, Walter, “A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly,” Quarterly Journal of Economics 85, Feb. 1971: 77-96

3. Cost-benefit analysis

Ezzell, Carol, “The Himba and the Dam,” Scientific American, June 2001: 80-89.

Varian, chapters 10 and 22

(optional) Freeman, A. Merrick, The Benefits of Environmental Improvements: Theory and Practice, Johns Hopkins: Baltimore 1979: Ch. 3 and 7.

(optional) Broome, John, “Trying to Value a Life,” Journal of Public Economics 9, 1978: 91-100

4. Game theory, oligopoly and fairness

Henrich, Joseph, et al, “In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies,” American Economic Review 91, May 2001: 73-78

Sigmund, Karl, et al., “The Economics of Fair Play,” Scientific American, January 2002: 83-87

Varian, Analysis, chapters 15 and 16

(optional) Smith, Vernon, “Constructivist and Ecological Rationality in Economics,” American Economic Review 93 (2003): 465-508.

5. Public goods

Milinski, Manfred, et al., “Reputation helps solve the `tragedy of the commons',” Nature 415, 2002: 425-427.

Samuelson, Paul, “Diagrammatic Exposition of Theory of Public Expenditure,” Review of Economics and Statistics 37, 1955: 350-356

Sandler, Todd, Collective Action, chapter 2

Varian, chapter 23

6. Uncertainty and information

Persson, Torsten and Tabellini, Guido, Political Economics, chapter 6

Varian, chapters 11 and 25

7. Social choice

Bergstrom, Ted S., “When Does Majority Rule Supply Public Goods Efficiently,” Scandinavian Journal of Economics 81, 1979: 216-226

Dasgupta, Partha and Maskin, Eric, “The Fairest Vote of All,” Scientific American, March 2004: 92-97

Kiefer, David Macroeconomic Policy and Public Choice, chapter 3