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Lecture 2

What is Economics Lecture 2 Manove.docx

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Boston University
CAS EC 101
Michael Manove

What is Economics? Lecture 2 Manove 9/5 Principles of Economic Thinking  Last time, we covered four useful principles of economic thinking. o 1. Think about the goods (not the money). o 2. Everything has a cost. o 3. Making rational choices. o 4. When deciding “how many,” think at the margin.  Now we will add three more principles. 5. People respond to incentives—sometimes in unexpected ways.  EX: Protecting the Elderly o A town ordinance prohibits eviction of the elderly for nonpayment of rent. o How would the ordinance affect housing for the elderly?  This law would make it more difficult to collect rent from the elderly…  So landlords would have an incentive not to rent to them.  EX: Protecting trees. o Suppose the U.S. Congress passes a tough law that limits the use of paper. o What would happen to the number of trees? o Suppose Congress made it illegal to eat chicken or eggs. What would happen to the number of chickens?  Chickens would lose their value.  Farmers would have a strong incentive to get out of the chicken business.  Almost all chickens would be destroyed.  Trees and Chickens o Are trees used for paper similar to chickens use food?  All chickens are farmed—there are no wild chickens.  But there are both wild trees and farmed trees, and most people think that wild trees are nicer. o If people stopped using paper, would there be fewer trees?  Fewer farmed trees? Probably yes!  More wild trees? Hard to know.  Conclusion: If people use less paper, we would probably have fewer farmed trees, but the effect on wild trees would be uncertain without a careful analysis of the data. 6. Prices that reflect ALL opportunity costs provide the best incentives.  Should drivers have to pay tolls for using highways?  Should universities be free? o We will discuss the cost of attending university later in the course.  EX: Highway Tolls o Are highway tolls necessary for good highway management? Why?  Taxes can be used for funding highway maintenance and law enforcement.  But tolls are the best way to reduce highway congestion.  Highway tolls (the prices) should cover the cost of congestion.  Who is willing to pay high tolls? Who isn’t?  EX: Price of Gasoline o What is the economic cost of using gasoline?  The expense of extracting petroleum, shipping it, refining it…  But that is only the beginning.  Losses from increasing the scarcity of gasoline
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