ECON 272
In Class Exercise Two
1. In general, what do economists do in order to deal with the two basic economic problems we discussed (this question relates to rules or institutions)?
a. With respect to the fact that we must make choices because of scarcity - explain why (and what) intended consequence might occur (why would the government want this rule?), and then a negative unintended consequence that might occur if the following rule was put in place: Every person (man, woman and child) must pay a "head tax" of $5,000 every year. Parents are responsible for paying their children's tax until the children reach 18 years of age.
Use the Model:
Rule: Every person (man, woman and child) must pay a "head tax" of $5,000 every year. Parents are responsible for paying their children's tax until the children reach 18 years of age.
Hint: Always choose ONE benefit OR ONE cost (not both) with respect to the rule and then continue with the analysis. You should get ONE intended and ONE unintended outcome.
Remember - the incentives pertain to those people who are subject to the rule -- NOT to those who put the rule in place!
Intended Outcome:
|
Rule or Institution Change |
Incentives (cost or benefit change) |
Actions |
Intended Outcome |
|
Every person (man, woman and child) must pay a "head tax" of $5,000 every year. |
|
|
|
Unintended Outcome:
|
Rule or Institution Change |
Incentives (cost or benefit change) |
Actions |
Unintended Outcome |
|
Every person (man, woman and child) must pay a "head tax" of $5,000 every year. |
|
|
|
2. Sometimes people think that rules need to be imposed upon us for order to emerge -- but there is evidence this isn't true. Explain why an order would emerge without an imposed rule.
3. What is the underlying axiom regarding human behavior that economists use (which relates to #2 – by the way, how does it relate to #2?)
4. What questions do you still have about this material?