Endowment effects.

/in /by

Endowment effects. #

Surveys and experiments reveal that people sometimes demand much more to give up something that they have than they would be willing to pay to acquire it. To illustrate, contrast a situation in which people have an opportunity to “sell” the clean air that they currently enjoy to a polluter to the situation in which people currently not enjoying clean air have an opportunity to “buy” clean air from a polluter. Evidence suggests that people may demand a higher price to “sell” a right to clean air than they would pay to “buy” the same right. An endowment is an initial assignment of ownership rights. The divergence between buying and selling price is called an endowment effect because the price varies depending on the initial assignment of ownership. Why might farmers place a different value on the right to be free from straying cattle depending on whether they were selling or buying that right? Is it rational to place different values on those rights? How do these flip-flops in the relative valuation complicate an efficiency analysis of the assignment of property rights?

Suppose that the local government determines that the price of food is too high and imposes a ceiling on the market price of food that is below the equilibrium price in that locality. Predict some of the consequences of this ceiling

/in /by

1. What conditions must hold for a monopoly to exist? 2. Suppose that the local government determines that the price of food is too high and imposes a ceiling on the market price of food that is below the equilibrium price in that locality. Predict some of the consequences of this ceiling. 3. The minimum wage is typically set above the market-clearing wage in the market for labor. Using a graph with an upward-sloping supply of labor, a downward-sloping demand for labor, with the quantity of labor measured on the horizontal axis and the wage rate measured on the vertical axis, show the effect on the labor market of a minimum wage set above the equilibrium wage rate.

How do full employment and high wages contribute to the power of fines as a deterrent?

/in /by

1. How do full employment and high wages contribute to the power of fines as a deterrent? 2. What are the main sources of randomness in the contemporary criminal justice system? 3. Do you think that this randomness discourages or encourages crime? 4. Opponents and proponents of capital punishment deny that their beliefs depend on the presence or absence of deterrence effects,73 yet Ehrlich’s study provoked intense debate and outrage. What do these facts say about the contribution of econometrics to criminal law?

What is meant by Pareto efficiency or Pareto optimality?

/in /by

1. What is meant by Pareto efficiency or Pareto optimality? What is the importance of the initial distribution of resources in determining what the distribution of resources will be after all Pareto improvements have been made? 2. A valuable resource in which we typically forbid voluntary exchange is votes. This may be inefficient in that, as we have seen, given any initial endowment of resources, voluntary exchange always makes both parties better off (absent any clear sources of market failure). Show that it would be a Pareto improvement if we were to allow a legal market for votes. Are there any clear sources of market failure in the market for votes? If so, what regulatory correctives would you apply to that market? Is it bothersome that there is a wide variance in income and wealth among the participants in this market, and if so, why is that variance more troubling in this market than in others, and what would you do about it in the market for votes?