Case Assignment and Economic Way of Thinking

Case Assignment and Economic Way of Thinking

Case Assignment

After reviewing the information listed on the background materials page, address the following questions in an essay or short-answer form. Support all your answers with references:

1. Explain the difference between positive and normative economics. Give a real-time example of each that you found in doing some outside research.

Normative economics relates to economics that tries to transform the world through the introduction of economic policies that enhance the welfare of the economy. According to Caplin and Schotter (2010), “normative economic question concerning how to design policies to move forward tends to treat economics as social therapy” (p. 0). In normative economics, value judgments are made of subjective statements with opinions instead of facts. In this regard, these opinions cannot be tested using available data or evidence. In this regard, therefore, statements drawn from normative economics are subjective. All in all, normative economics is founded on theories of choices, and hence, it suggests new ways to positive economics (Caplin & Schotter, 2010). Some of the subjective statements relating to normative economics include the following.

• Inflation is least detrimental to the economy than unemployment
• The federal government and state governments should hike the minimum wage to $15 per hour to cut the levels of poverty in the country.
• Pollution has significant detrimental impacts on the economy.
• The retirement age should be increased to 68 years to mitigate the impact of the aging population on the economy.
• The government made a correct decision by imposing more taxes on products such as beer and cigarettes.
• The market mechanism is the appropriate method of allocating and distributing resources in a country.
• The banning of alcohol in supermarkets and shopping malls is the best government policy of controlling its consumption.
• The government must raise congestion charges for people who drive petrol-guzzling cars to $30 to ease congestion on roads.

Positive economics, on the other hand, relates to economics that depicts economics in their actual status, that is, without altering or suggesting economic policies to enhance its welfare of economy (Caplin & Schotter, 2010). This branch of economics is associated with positive statements whose objectives can be tested, altered, or rejected based on the available data or evidence. In this regard, therefore, positive economics is concerned with objective explanation as well as testing and rejecting the existing theories (Caplin & Schotter, 2010). Some real-time examples of positive statements that relate to positive economics include the following.

• The decline of incomes in the country will culminate in the increase in demand for cheaper goods and services.
• An increase in corporate tax will lead to the decline of profitability of companies operating in the country.
• An increase in the price of gas in global markets will compel a significant number of people to shift to cycling as their primary means of going to work.
• Cutting income tax will enhance the probability or incentive of unemployed people to get employment.
• Increasing interest rates will lead to the decline of houses.
• A scheme that deals with crapping cars will culminate in the decline of prices of used vehicles.
• An increase in temperatures will lead to the rise of demand for cold drinks.
• Reducing the price of alcohol will lead to increased demand for alcohol-related products.

1. After doing some additional research on your own along with the assigned reading on public goods, answer the following questions:

1. What are the two main characteristics of this type of good?

The first important attribute of a public good is nonexcludable. This attribute means that impossible or costly to keep out other people from consuming the same good (Kennedy, 2016). Goods, such as street lights, public roads, and security, are public goods. The provision of public goods such as street lights serves all people near them. An individual cannot exclude other people from using an open road, street lights, or national defense. Again, a person cannot exclude himself/ herself from consuming a public good. For instance, a person relies on streets light while on the road, irrespective of chooses or does not choose to use them.

The second imperative attribute of a public good is nonrivalrous. Notably, this attribute implies that more than one individual can use a public good without affecting the usage or the level of satisfaction on other consumers (Kennedy, 2016). In public goods, such as street lights, public roads, and security, their consumption of one does not affect the expenditure by the other person. For instance, if individual A is using street lights, his/ her consumption does not reduce or hinder the usage of the same street lights by individual B. In this regard, therefore, there is no rivalry in the utilization of public goods.

1. What is the biggest “problem” with allocating public goods?

The main “problem” associated with the allocation of a public good is the supply problem. Public goods face supply problems because of their two attributes; that is, nonexcludability and nonrivalrous (Wilson, 2003). These characteristics cultivate behavior that leads to an out that from a personal standpoint is rational, but from a collective point of view is suboptimal and, in some cases, disastrous. The provision and allocation of a public good are impaired by a free-rider problem and the prisoner’s dilemma. Garret Hardin provides an extensive explanation of the free-rider problem phenomenon in his essay titled “The tragedy of commons” (Wilson, 2003). He gives an example of a common pasture where shepherds use a system that forces each one of them to increase his sheep or cows without limit, hence leading to overgrazing and degradation of land. In this case, the desire to have more sheep or cows to benefit at the expense of others from the common pasture is the free-rider problem. In short, the free-rider problem does not allocate resources equally, as some people use their self-interest to gain more at the expense of others (Wilson, 2003). Under the prisoner’s dilemma, on the other hand, people pursue their self-interests instead of collective gain. The use of public goods is similar to prisoners who use their world against others to get a short sentence at the expense of others (Wilson, 2003). In this case, people with information about a social good tend to “over-consume” it like in the case of common pasture; hence, leaving very little to the rest

1. Do you think the government should have a role in allocating public goods, or should goods be privatized?

I believe that the government should have a role in allocating public goods. Mainly, this is because public goods have some unique attributes that make it hard for the private sector to supply in the market; hence, leading to market failure. In line with Arora and Chong’s (2018) argument, some public goods such as roads are costly to be left to the private sector to provide. Besides, some public products, such as education, are necessities, and hence leaving the private sector to ensure it alone will lead to the exploitation of consumers. Again, leaving the provision of public goods like security goods to the private sector will result in insecurities, as the private sector will focus on areas that are profitable and ignore the rest. Besides, the involvement is essential, given that it eliminates the aspect of free-riders problems. As Arora and Chong (2018) point out, this is because at the individual level, people act based on their interests, and therefore no one intends to incur costs alone for a good that will be consumed by a multitude. Further, it should have a role in allocating public goods because it institutes laws that govern their usage and overall protection. Overall, the government plays a vital role in the allocation of public commodities through the provision, protection, and distribution to the public.

Discussion: Economic Way of Thinking

Here’s a question for you; Should Peyton Manning mow his own lawn? Suppose Peyton can do the job in 2 hours, or he can hire a gardener, Kris, to do it in 3 hours. Kris charges $30 an hour. Who should do the job, Peyton or Kris? Explain. Be sure to use some economic concepts in your post, such as supply and demand. And do not forget to cite any sources you used

Peyton Manning should mow his own lawn. Mowing his lawn is based on the microeconomic concepts of rational behavior or rational decision making, and opportunity cost. Under neoclassical economics, a primary behavioral assumption is that consumers and other decision-makers act in a purposeful manner; whereby, their actions focus on achieving the objective (Henderson, 2008). In Peyton Manning’s case, the main aim is to lawn his mow, and he has two alternatives – mow the lawn himself or hire mowing services from Kris. From an economic perspective, these options are the competing alternatives in which Peyton Manning needs to choose one and forgo the other one.

To choose the best alternative, he has to consider the available resources and the cost of each choice. In line with Henderson’s (2008) argument, rational consumers such as Peyton Manning face a problem of “allocating scarce resources among these competing ends” (p. 26). A rational decision relates to choosing an alternative that consumes fewer resources. As noted in the case, the option of Peyton Manning mowing his lawn takes 2 hours, while hiring Kris for the same work takes 3 hours. Kris earns $30 per hour, so the total cost of mowing Peyton Manning is $90. Assuming that $30 per hour wage is standardized in that Peyton Manning will earn $30 per hour for doing the same job, he will receive $60 after 2 hours. Since the opportunity cost of mowing his lawn is lower than hiring Kris, it is imperative for Peyton Manning to do the job. In short, mowing his lawn is the alternative that makes Peyton Manning better off.

References

Arora, P. & Chong, A. (2018). Government effectiveness in the provision of public goods: the role of institutional quality. Journal of Applied Economics, 21(1), 175-196.

Caplin, A. & Schotter, A. (2010). The Foundations of Positive and Normative Economics: A Handbook. Oxford, UK: Oxford University Press.

Henderson, J. (2008). Health economics and policy. Mason, OH: Cengage Learning.

Kennedy, P. S. J. (2016). The demand models of national defense budget. 2nd Proceedings:  Sriwijaya, Accounting, and Business Conference. SEABC Official.

Wilson, J. (2003). Globalization and the limits of national merger control laws. New York, NY: Kluwer Law International BV.