Difference between revisions of "Economics Lecture Five"

From Conservapedia
Jump to: navigation, search
(more thoughts)
(improved)
Line 1: Line 1:
 
{{Economics_Lectures}}
 
{{Economics_Lectures}}
 +
This Lecture we will review the basic concept of "elasticity", learn about the differences between the short run and the long run, and then study the powerful Coase theorem.  You’ll find those topics interesting and helpful.
  
One week break. No class Oct. 1stThis lecture is for Oct. 8th.
+
By now you may have noticed that there is a style to economics: simple concepts are studied very carefullyPatience is valuable in solving economic problems carefully. Unlike history or even math, it helps in economics to be very careful when initially considering a problem. Haste or sloppiness can lead to unnecessary mistakes. 
  
Explain income elasticity (luxury, necessity, and inferior goods) and mistake on question 4 from the homework for Week three.
+
In fact, we could define economics based on its unique style:  economics consists of making simple observations about complex situations in order to derive powerful results.  There may be many things that are unknown or uncertain about a situation, but economics looks at what can be determined and then derives as much as possible from what is known.  For example, one might ask an economist what he can say about public school classes.  Most people might respond, "I can't say anything about them without knowing more information."  But an economist thinks about what can be said despite the lack of knowledge of all the details.  The economist might say that we do this this:  public school classes avoid prayer and discussion of the Bible.  From that simple observation, an economist might draw powerful conclusions:  students are missing out on the central source of wisdom and comfort.
  
Review elasticity:
+
== Review: Elasticity ==
 +
 
 +
In Lecture 3 we learned about "elasticity", which is the responsiveness of something (such as quantity of a good demanded) to a change in price or income.  This important economic is worth reviewing further.  Many questions on an economics exam (such as the CLEP) ask about elasticity.
 +
 
 +
Most questions about elasticity concern elasticity ''of demand''.  Explain income elasticity (luxury, necessity, and inferior goods) and mistake on question 4 from the homework for Week three.
  
 
price elasticity, along with variations of substitutes and complements
 
price elasticity, along with variations of substitutes and complements
Line 13: Line 18:
 
necessities and luxuries
 
necessities and luxuries
  
Short section on the mind of an economics:  simple concepts studied very carefully.  Patience required.  Haste or sloppiness can lead to many mistakes.  New definition of economics:  making simple observations about complex situations in order to yield powerful conclusions.
+
== Introduction to Short and Long Run ==
 
+
The vice of limiting supply (from question 7 on last homework; consumer surplus)
+
 
+
We have talked about the concept of “equilibrium”, which is when the price and quantity settle down to their appropriate amounts after bouncing around for a while.  At equilibrium, supply price and quantity equal demand price and quantity.  But it may take time to get to equilibrium, with much trial and error in pricing in the meantime.
+
  
 
Last lecture we focused solely on “demand”.  This time we turn to “supply”.  We look at how companies decide how much product to make and put out into the market.  How many goods should a company produce, or how many services should it provide?
 
Last lecture we focused solely on “demand”.  This time we turn to “supply”.  We look at how companies decide how much product to make and put out into the market.  How many goods should a company produce, or how many services should it provide?
 +
 +
The vice of limiting supply (from question 7 on last homework; consumer surplus)
  
 
Before we start, however, we define two terms essential to economics: the “short run” and the “long run.”  As its name implies, the “short run” is a relatively short period of time in which a company can only make temporary changes to its operation.  In a sporting contest, the “short run” would during a game, when the coach decides to substitute his players or alter the game plan to try to win that particular contest.  During the “short run” only quick and temporary reactions by a company or firm to a fluctuation in demand are possible.  For example, changes like using more overtime labor would be a short run adjustment.  Or telling workers to take an extended vacation due to lack of demand for the goods would be another short run change.  This class we will be focusing on the “short run.”
 
Before we start, however, we define two terms essential to economics: the “short run” and the “long run.”  As its name implies, the “short run” is a relatively short period of time in which a company can only make temporary changes to its operation.  In a sporting contest, the “short run” would during a game, when the coach decides to substitute his players or alter the game plan to try to win that particular contest.  During the “short run” only quick and temporary reactions by a company or firm to a fluctuation in demand are possible.  For example, changes like using more overtime labor would be a short run adjustment.  Or telling workers to take an extended vacation due to lack of demand for the goods would be another short run change.  This class we will be focusing on the “short run.”
Line 28: Line 31:
  
 
For now, let’s focus on the “short run.”  The key concepts are “marginal cost” and “marginal revenue.”  How much does it cost to make one more widget, and much revenue does that extra widget generate for the company?  That additional cost per unit is called “marginal cost.”  The additional revenue per unit is called “marginal revenue.”  As long as marginal revenue is slightly higher than marginal cost, then it makes sense to produce that extra widget.  Typically, companies continue making more and more goods until marginal revenue falls below marginal cost, at which time they stop production because they begin to lose money on each additional good they produce.
 
For now, let’s focus on the “short run.”  The key concepts are “marginal cost” and “marginal revenue.”  How much does it cost to make one more widget, and much revenue does that extra widget generate for the company?  That additional cost per unit is called “marginal cost.”  The additional revenue per unit is called “marginal revenue.”  As long as marginal revenue is slightly higher than marginal cost, then it makes sense to produce that extra widget.  Typically, companies continue making more and more goods until marginal revenue falls below marginal cost, at which time they stop production because they begin to lose money on each additional good they produce.
 
We will not spend this entire class on marginal cost and revenue.  We are also going to introduce two other concepts basic to modern economics: efficiency and the Coase Theorem.  You’ll find those topics extremely interesting.  However, let’s cover the basics first.
 
 
 
 
==The Short Run==
 
==The Short Run==

Revision as of 12:08, October 4, 2009

Economics Lectures - [1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 - 10 - 11 - 12 - 13 - 14]

This Lecture we will review the basic concept of "elasticity", learn about the differences between the short run and the long run, and then study the powerful Coase theorem. You’ll find those topics interesting and helpful.

By now you may have noticed that there is a style to economics: simple concepts are studied very carefully. Patience is valuable in solving economic problems carefully. Unlike history or even math, it helps in economics to be very careful when initially considering a problem. Haste or sloppiness can lead to unnecessary mistakes.

In fact, we could define economics based on its unique style: economics consists of making simple observations about complex situations in order to derive powerful results. There may be many things that are unknown or uncertain about a situation, but economics looks at what can be determined and then derives as much as possible from what is known. For example, one might ask an economist what he can say about public school classes. Most people might respond, "I can't say anything about them without knowing more information." But an economist thinks about what can be said despite the lack of knowledge of all the details. The economist might say that we do this this: public school classes avoid prayer and discussion of the Bible. From that simple observation, an economist might draw powerful conclusions: students are missing out on the central source of wisdom and comfort.

Review: Elasticity

In Lecture 3 we learned about "elasticity", which is the responsiveness of something (such as quantity of a good demanded) to a change in price or income. This important economic is worth reviewing further. Many questions on an economics exam (such as the CLEP) ask about elasticity.

Most questions about elasticity concern elasticity of demand. Explain income elasticity (luxury, necessity, and inferior goods) and mistake on question 4 from the homework for Week three.

price elasticity, along with variations of substitutes and complements income elasticity

normal and inferior goods necessities and luxuries

Introduction to Short and Long Run

Last lecture we focused solely on “demand”. This time we turn to “supply”. We look at how companies decide how much product to make and put out into the market. How many goods should a company produce, or how many services should it provide?

The vice of limiting supply (from question 7 on last homework; consumer surplus)

Before we start, however, we define two terms essential to economics: the “short run” and the “long run.” As its name implies, the “short run” is a relatively short period of time in which a company can only make temporary changes to its operation. In a sporting contest, the “short run” would during a game, when the coach decides to substitute his players or alter the game plan to try to win that particular contest. During the “short run” only quick and temporary reactions by a company or firm to a fluctuation in demand are possible. For example, changes like using more overtime labor would be a short run adjustment. Or telling workers to take an extended vacation due to lack of demand for the goods would be another short run change. This class we will be focusing on the “short run.”

In the “short run” it is impossible to change the fixed costs, or “sunk costs.” The cost of factory, and the equipment inside, cannot be altered. These fixed costs can be easily measured by seeing what the total costs are when output is zero. That is because when output is zero, there are no marginal costs, and all the costs are the fixed ones.

The “long run” consists of a time period long enough to make basic and permanent changes, like building new factories, buying new equipment, and hiring and training new employees. In a sporting contest, it would include scouting and drafting new players, or building a new weight room. Everything can be adjusted in the “long run”: workforce, facilities, materials, equipment, investment, etc. We’ll discuss the “long run” next class.

For now, let’s focus on the “short run.” The key concepts are “marginal cost” and “marginal revenue.” How much does it cost to make one more widget, and much revenue does that extra widget generate for the company? That additional cost per unit is called “marginal cost.” The additional revenue per unit is called “marginal revenue.” As long as marginal revenue is slightly higher than marginal cost, then it makes sense to produce that extra widget. Typically, companies continue making more and more goods until marginal revenue falls below marginal cost, at which time they stop production because they begin to lose money on each additional good they produce.

The Short Run

Imagine yourself as the President of a company making widgets, our imaginary good. If it costs you $200 to make 10 widgets and $205 to make 11 widgets, then what is your marginal cost (MC) of the 11th unit? It is only $5. What is its average cost? Nearly $19 ($205 total cost divided by 11 total units). Average cost is often greater than the marginal cost. This makes sense, because once you pay for your factory and workers, you do not have much additional cost to produce an extra unit. This is called economies of scale: the bigger your operation, the cheaper you can make one more unit.

Think of a baking some bread. It requires some time and effort to bake one loaf of bread. But there is not as much extra effort to stick another loaf in the oven.

Or imagine going to a baseball game. The cost for one person to go is the ticket price plus the cost of gas and parking and wear and tear on the car. The cost for a second person to go with the first person is just the price of the ticket. There is no extra gas or parking or wear and tear on the car for a second person to ride along. So the marginal cost for the second person is much less than for the first person.

But let’s return to your role as President of the widget company. You are deciding how many employees to hire. You have an assembly line that needs workers. Each additional employee that you hire to work on that assembly line increases the “marginal product of labor,” which is the increase in output for each additional unit of labor. It is often called “MP”.

Let’s explain MP a different way to make sure you understand it. The more workers you hire, the more goods your company can produce. Suppose you can make 1000 widgets a week with 10 employees. Then you hire one more employee, and your output increases to 1015 widgets. What is the “marginal product of labor,” or MP, for your 11th employee? It is 1015-1000=15. Note that is less than the average product of labor, which 1015/11 = 92.3 for 11 employees. You are suffering from “diminishing marginal returns.” You received much more benefit from the 1-10 employees you hired earlier (their average product of labor is 100) than this 11th employee (with its MP of only 15).

Again, this makes sense. As you hire more and more employees, your benefit from will eventually decline. Once the assembly line has enough workers to satisfy demand, for example, you would be wasting money by hiring additional workers. They would end up spending the day talking to each other rather than doing productive work. If you were to keep hiring employees, then eventually the MP for your next employee would fall to zero. He would have nothing productive to do.

On the other side, however, the MP for your first employee would be greater than zero. Additional employees might have even higher MPs because you are filling your assembly line. If your assembly line needs 10 employees to run it, then the MP for your 10th employee will the highest of all. After that, the MP begins falling.

In general, MP rises as your initial employees are hired, eventually reaches a maximum at some point and then falls back towards zero for each additional employee. It is an upside-down oval, beginning at MP=0 for 0 employees and returning to MP=0 for a large number “n” of employees. The value of “n” depends on the business.

The optimal number of employees for an NBA basketball team, when MP is its maximum, is only about a dozen players. The optimal number of employees for Wal-Mart, when MP is its maximum, is over 1 million employees. So it all depends on what the company is producing.

Can we can find the marginal cost (MC) of making that extra widget based on (i) the wages we have to pay the extra employee and (ii) his marginal productivity (MP)? If it costs us $100 to hire one more employee, and he enables us to make 10 more widgets, then our marginal cost (MC) is simply $100/10 = $10 per unit. In other words, MC = wage/MP.

Let’s make sure we understand this by looking at another example. Suppose that hiring one more sales agent at $80 per day in our clothing store enables us to sell 8 more dresses. What is our marginal cost for dresses at that point? It is simply the additional cost of $80 (the wage) divided by that employee’s marginal productivity of 8 new sales, yielding a marginal cost of $10 per dress.

Efficiency

Imagine what your day is like as President of the widget factory. You arrive to work earlier than everyone else, because you care the most about the success of your company. During the workday you walk through your factory to see how things are going. You see employees chatting at the water cooler, talking to their friends on the phone, or not showing up for work at all. This irritates you because you are paying for their time. You tell them to get back to work.

You also see equipment sitting idle for various reasons. That annoys you too. You paid for the equipment, or you are renting it, but it is not helping your business by sitting idle. You want to return or sell it, or find a way to make it useful.

Less easy to see are the wasted opportunity costs. Perhaps your assembly line could be making a different kind of widget that would be more profitable than the one you are making.

All your concerns can be summed in one economic term: “efficiency”. Efficiency is the maximum possible productivity at any given time. It consists of the least amount of wasted time, effort or money. There is no wasted opportunity cost in an efficient operation.

For once, this is an economic term (“efficiency”) that has the same meaning as its common everyday usage. “It was an inefficient use of my time to sit here all morning waiting for you!” “Try to do your chores more efficiently so that you can finish sooner.” “She finishes her homework faster than you because she works more efficiently.”

Generally, maximum efficiency is desired and people want to avoid wasted time, materials, effort, and expense. However, there is a significant obstacle to true efficiency: transaction costs. Recall that “transaction costs” are all the incidental expenses that a consumer must spend to acquire a good. One textbook defines transaction costs as “the time, effort, and expense that go into the purchase of a good.” (Spencer, Contemporary Economics, at p. D-53). Nobel laureate Ronald Coase, discussed below, describes “transaction costs” as simply the “costs of using the market.”

If you love the homemade ice cream at your favorite restaurant, then you have to spend the time and money driving there, waiting for a table, tipping the waitress, paying the sales tax, etc. All you wanted was the homemade ice cream, but many transaction costs stand in the way of a perfectly efficient transaction.

One day you may want to buy a house. Ideally, you would like to drive up to the house you want and pay the owner directly, and then move in. But in reality, there are enormous transaction costs in buying a house. These include finding what you want, bargaining over the price, paying the real estate broker and attorney, and so on. Those transaction costs drive up the price of the house, and create inefficiencies.

Some transaction costs are imposed by governmental regulations. In many areas, homeowners must receive permission to chop down trees on their yards or build an addition. The time and expense in obtaining that approval by the local zoning board are transaction costs.

The Coase Theorem

The most-cited paper in all of economics[1] is “The Problem of Social Cost,” published by Professor Ronald H. Coase in 1960. It describes what later became known as the “Coase theorem,” a fundamental conservative insight about entitlements and property rights. Though criticized for thirty years by professors who disliked its implications, this theorem was finally recognized by the 1991 Nobel Prize of Economics, of which Professor Coase was the single recipient.

Very few economics courses even mention the theorem, and those that do teach distorted interpretations of it. Professor Coase himself has endured unfair academic disdain and criticism, including being called a “dinosaur” by one colleague.[1]

The Coase Theorem Explained

Like Isaac Newton, who invented calculus in order to do his work on physics, Ronald Coase first invented a new concept of “transaction costs” to lay the groundwork for his insight. As we explained in an earlier lecture, “transaction costs” consist of the time, money, and effort someone loses in obtaining what he wants. The libertarian law professor Richard Epstein tersely summed up the meaning of “transaction costs” in one word: “friction.”[1] Coase’s Nobel Prize was based on his discovery and development of this new concept, and the committee conferring the prize (the Royal Swedish Academy of Sciences) likened this to the discovery of a new set of elementary particles.

Once “transaction costs” were discovered and described, Coase’s insight became possible. The Coase theorem states that in the absence of transaction costs, an efficient or optimal economic result occurs regardless of who owns the property rights. The free market guarantees the efficient outcome regardless of who owns what, because there will remain incentives to bargain towards the efficient result until it is achieved. This is true even for activities that generate “negative externalities” (harm to others); freedom to negotiate will enable all affected to bargain towards the most efficient output.

Restated another way, if property rights are well-defined and transaction costs are zero, then the most efficient or optimal economic activity will occur regardless of who holds the rights, because negotiation and market transactions will ensure the optimal allocation and use of property in a free market.

Chicago federal trial judge Milton I. Shadur explained the legal meaning of this theorem. “So long as the rule of law is known when parties act, the ultimate economic result is the same no matter which way the law has resolved the issue.”[2] Whether the law gives an entitlement to a rich man or a poor one, the economic activity will be the same, assuming people can bargain freely with each other.

An oversimplication of this concept is Ralph Waldo Emerson’s famous statement that if a man can “make a better mouse-trap … [then] the world will make a beaten path to his door.” Assuming people can deal without regulatory or other barriers, it does not matter who invents the mousetrap or who obtains legal rights to it. The free market will ensure that the better mousetrap is sold to the public for the benefit of all involved.

But an entire educated class—including lawyers, accountants, and politicians—makes a very good living from transaction costs. Leading academics build their life’s work on the claim that “reforming” legal entitlements and property rights will somehow improve society. The Critical Legal Studies movement, started in 1977 at a conference at the University of Wisconsin at Madison, asserts that the upper class manipulates the law in order to perpetuate oppression of the lower class. The Coase theorem, however, disproves all that. Unchanging legal rules have no effect on economic activity, in the absence of transaction costs.

The meaning of Coase’s insight for government regulation was unmistakable. A society is better off by simply assigning property rights, reducing transaction costs, and getting out of the way so that the market process can reach its most efficient result. Government regulations that add transaction costs hurt efficiency and prosperity. In response to the question “What’s an example of bad regulation?,” Coase replied, “I can’t remember one that’s good.”

The Most Famous Dinner in the History of Economics[3]

Initially Professor Coase’s theory was not well-received, even by economists. In 1959 Coase, then in the economics department at the University of Virginia, published an early version in a paper concerning allocation of the radio frequency spectrum. Coase proposed that the Federal Communications Commission reject its current bureaucratic procedures for assigning licenses and simply sell frequencies in the spectrum to the highest bidders. Coase elaborated on his theory in his paper, and every economist at the University of Chicago objected. Even though the Chicago economists were predisposed towards free markets, they thought Coase had erred.

But these economists wanted the truth, and they invited Coase to a friendly dinner at the home of the great conservative economist Aaron Director. Milton Friedman and George Stigler were among those in attendance who thought Coase had erred. As the hors d’oeuvres were served, the vote was 20 against Coase’s theory and only Coase in favor of it. As the two-hour discussion proceeded, it became like a scene from the famous movie 12 Angry Men. One by one, bit by bit, the great economists came over to Coase’s side as their objections were resolved. By the end their leader, Milton Friedman himself, heroically admitted that he had been wrong and Coase was right. To his enormous credit, Professor Friedman then became an energetic champion of Coase’s theory.

The dinner attendees thanked Coase and invited him to write up his theory more fully for the new Journal of Law and Economics, and that version became by far the most cited paper in all of economics.

The Man Behind the Coase Theorem

Who is this man behind this revelation? It took an unconventional education to bring forth this unconventional work. Professor Ronald Coase, born in 1910 in England, suffered from a physical handicap as a youngster and thus could not attend regular school. He had to wear leg braces and was eventually enrolled in a school for “physical defectives.” But that school was managed by the same organization that ran the school for “mental defectives,” and Coase later explained that there was “some overlapping in the curriculum.”[4] As a result, Coase spent his days in basket-weaving classes, and was deprived of any formal academic instruction until age 10.

He eventually found his way to the London School of Economics, where he remained a socialist until his senior year, when he landed in a seminar taught by Professor Arnold Plant. That course was devoted to the “invisible hand” and featured stimulating discussions without any readings. It changed Coase’s life, as he embraced the power of the free market.

Later he emigrated to the United States and eventually earned a faculty position at the University of Chicago. His work almost never included a mathematical equation or formula, contrary to the modern trend in economics. To this day many in the field of law and economics, which Coase helped found, pursue quantification that he would never have done himself.

Professor Coase’s breakthrough was analogous to that of mathematician Kurt Gödel. Both proved startling limits on their colleagues’ ability to achieve, and as a result both received a chilly reception from their peers. Coase and Gödel took the wind out of their colleagues’ sails, so to speak, by demonstrating what cannot be done.

Implications of the Coase Theorem

In public policy, the Coase theorem implies that greater efficiency and prosperity can be obtained by reducing and eliminating transaction costs. Bureaucratic hurdles erected by government and the legal system increase transaction costs and reduce efficiency and prosperity. Society as a whole would be better off if transaction costs were minimized. Wealth is lost by impeding the ability of people to negotiate private contracts among themselves. The role of government to increase prosperity should focus on lowering transaction costs, not raising them.

Often the best a court can do to maximize prosperity is to minimize transaction costs that impede negotiations between parties. But in 1970, as the legal profession ignored Coase, the Warren Court expanded regulatory burdens on state administration of welfare in the mistaken view that more regulations would help the poor. In 1996, the Republican Congress enacted welfare reform that superseded that decision, conservative legislation that was “the greatest social policy success of the 1990s” and “reduced the states’ welfare rolls an average of 60 percent.”

In no industry are the transaction costs greater than in medical services, where patients and physicians must waste massive amounts of time determining how much a procedure costs, whether a third party will pay for it, and obtaining payment from that third party. In some cases the transaction costs are even infinite, as bureaucrats try to prohibit entirely private contracts with a physician who has not opted out of Medicare.

The Coase theorem demonstrates that these transaction costs can only detract from overall wealth and efficient economic behavior. Legal impediments to private contracting for medical services should be removed, as such interference frustrates the ability to reach economically optimal results. The best that government can do in controlling medical costs is simply to remove the transaction costs and get out of the way so that the parties–patients and physicians–can negotiate optimal arrangements.

The Coase theorem also provides economic justification for adhering to Rule of Law, and rejecting an “evolving” Constitution. As Judge Shadur observed above, as long as there is a rule of law it does not matter to prosperity where that rule assigns the rights. Legal theorists or litigants cannot devise a new allocation of rights or entitlements that would increase prosperity. Often the best courts can do is embrace the Rule of Law, and then get out of the way. Changing rules midstream, as in arbitrarily taking one’s property, is economically harmful.

There are also mind-bending implications of this theorem. Money itself is a property right, and that property will also be allocated to its most efficient uses regardless of who controls it, assuming rational behavior and no transaction costs. Judge Shadur explained above that the Coase theorem means “the ultimate economic result is the same no matter which way the law has resolved the issue,” and likewise the economic result is the same no matter which rational person has the property right to the wealth. Bill Gates may control $200 billion or so, but his only rational influence over investing that capital is the same as that of a rational homeless man: allocate it towards the greatest demand in the market. Of course, Gates could choose to dispose of his wealth wastefully, but that would be even less meaningful. Simply put, the annual list of the Forbes 400 is no more meaningful to economics than an annual list of a “homeless 400” would be, though a story about the latter would not play on readers’ envy as well.

The Coase theorem even justifies the famous observation by Jesus that we “will always have the poor among” us. Misguided governmental attempts to reduce the gap between the rich and the poor require injecting transaction costs into the system to restrain the successful and help the unsuccessful. These transaction costs include taxes and, in the case of medicine, medical boards, auditors and prosecutors that curb the innovators and achievers. But the more transaction costs are injected into the system, the more inefficient it becomes.

Government cannot reduce the gap between rich and poor without detracting from overall efficiency and prosperity. In other words, the only way government can eliminate the poor (relative to the rich) is by imposing transaction costs that make everyone poorer.

Assignment

Read and, if necessary, reread the above lecture. Then answer these questions:

<improve questions:> <substitute in several more questions about elasticity, especially elasticity re: substitutes and complements>

1. Your boss asked you to work overtime. Is that a short-run or long-run solution for him?

2. Explain briefly economic “efficiency”. Give an example of something that is efficient, and something else that is not.

4. Your widget company has the following costs: Producing 10 widgets, your costs are $2000. Producing 8 widgets, your costs are $1800. Producing 6 widgets, your costs are $1500. Producing 4 widgets, your costs are $1200. Producing 2 widgets, your costs are $800. Producing 0 widgets, your costs are $400. What is your fixed cost? What is your MC for widgets 7 & 8? What are your average costs for producing 4 widgets?

5. A regulator had to choose new regulation A or B: (A) imposed substantial new transaction costs on consumers, while (B) did not. Which option would the Coase Theorem tend to prefer? Say why.

6. Explain why a businessman fixes his production or supply of goods at the point where his marginal cost equals his marginal revenue.

7. Explain the difference between marginal cost and average cost.

Honors

Write a 300-word essay on one or more of the following:

9. Write about any aspect of the Coase theorem you like.

10. "A bird in the hand is worth two in the bush." Explain that thought in economic terms, including a discussion of risk.

<revise questions:> 10. Democratic politicians complain about the gap between the rich and poor. Would the economy work any better if the gap were smaller? Assume the absence of transaction costs.

11. The Fifth Amendment says “nor shall private property be taken for public use, without just compensation.” How does that benefit the economy?

12. “The pen is mightier than the sword.” Assuming that the sword is used mainly to seize property, explain a purely economic justification for that statement.
  1. 1.0 1.1 1.2 http://www.boston.com/globe/search/stories/nobel/1991/1991i.html
  2. Coltman v. Commissioner, 980 F.2d 1134, 1137 (7th Cir. 1992).
  3. Warsh D., Knowledge and the Wealth of Nations: A Story of Economic Discovery 299 (2006).
  4. http://www.reason.com/news/printer/30115.html