ESM 251 Problem Set 1
TA: Grant Answers
1
Point values are in brackets; 100 points total
1. [10] (Definitions of positive and normative must be clear, 5 points). Normative
decisions, ‘what ought to be in order to get best outcomes,’ underlie nearly all policies
and institutions, including the EPA. The EPA’s mandate is to procure a cleaner, healthier
environment for those living in the US. But even this mandate is open to normative
interpretation: how much cleaner? At what/who’s expense? Should the programs be
voluntary or regulatory?
These policy-type ‘should’ decisions are typically left to democratic and
executive decision making. An economic pursuit (and firmer ground for all scientific
assessments) is to determine the different theoretical consequences of potential actions
and/or empirically measure the current state of affairs – POSITIVE assessments; and
these are made within the framework of a NORMATIVE policy (which can be efficiency,
equity, sustainability, etc.). These assessments are still considered advice (advisor role):
“If you want to attain X via this policy, you should know that A, B, and C will be
affected in this way and D, E, F will be affected in a different way.” In this way we can
determine if X is something that society wants relative to another option.
An exasperated Harry S. Truman once said “Give me a one-handed economist!
All my economists say, On the one hand…, on the other… ”. This is clever, but we
would rather know how the various choices are obtained and the pertinent affects than
limit options or not act at all. Sometimes, economists (and scientists) may appear like
advocates when the policy described has clear negative (or positive) impacts for all
involved. So, while your analyst and advisor will need to know the criteria by which to
gather information about relevant options, you will certainly care that her positive views
are accurate.
2. [10] The organization measures the value of each option, assessing the net benefit of
the impact the action will make: benefits (dependent upon the organization’s goals)
minus costs (spending the budget and time pursuing those goals). Opportunity cost is the
value of the greatest opportunity lost; therefore we must decide which SINGLE option is
the second best (whichever one has second highest net benefit; you can assume and name
one, e.g. “assume Lobbying is the next greatest benefit”) and the net value of that one
alternative option is the opportunity cost. The surplus is the difference of value
between the first and second option.
3. [12] Stating the type of good is important!
a) The housing market: consumers’ incomes increase.
Normal good: Demand shifts right/up.
Inferior good (mobile homes): Demand shifts left/down
b) The camera market: the price of film goes up.
1. Digital camera substitutes: demand shifts right/up
2. Film camera complements
*
: demand shifts left/down
c) The sugar market: there is a drought in the sugar cane fields in Florida.
Reduced production: Supply shifts left/up
*
NOTA BENE: A “compliment” is an expression of praise; an economic “complement” is a beneficial
counterpart to a good.
