Harvard Kennedy School Fall 2016
API101Z
Markets and Market Failure
Faculty: Chris Avery
chris_avery@harvard.edu
KSG L212
Office Hours: Monday 1:00 pm to 3:00 pm
Thursday 2:00 pm to 4:00 pm
Teaching Fellow: Guthrie GrayLobe
Guthrie_graylobe@hksphd.harvard.edu
Meetings: Monday, Wednesday, 10:15 am – 11:30 am, HKS Land Hall
Review Sections: Friday, 1:15 pm – 2:30 pm, L280
Important Dates
First Class Meeting: Wednesday, August 31, 2016 10:15 am to 11:30 am.
First Section Meeting: Friday, September 2, 2016 1:15 pm to 2:30 pm.
Midterm Exam: Wednesday, October 19, 2016 10:15 am to 11:30 am.
Final Exam: Monday, December 12, 2016 3:00 pm to 6:30 pm.
Overview
API101 applies microeconomic reasoning to public issues, policies and programs. It considers economic incentives and organizations; models of economic behavior; the operation of markets; the price system and how it works; the consequences of market failure and interventions in markets; and policy objectives and instruments. All sections cover a common set of core topics. Section Z is differentiated from the other sections because it assumes prior knowledge of calculus.
Details about the “Z” Section
The Zsection is aimed at students who feel quite comfortable using math, have a working knowledge of basic calculus, and are motivated to delve more deeply into some topics and also to learn some advanced skills. By using calculus based methods, Section Z is able to cover some topics in more depth than the other sections of API101. The use of mathematics in Section Z is only a means of communication rather than an end in itself; the common objective of all sections of API101 is to provide students with a solid economic intuition and an ability to apply economic insights to realworld problems.
If you find that the use of mathematics often fails to clarify things for you, you are probably better off in the noncalculus sections of API101. If you have had a lot of economics before and are now looking for a much more advanced treatment of the same material; then the Zsection is probably not for you either, and you might consider taking API111.
To ensure equitable grading across all of the sections, approximately twothirds of the problems on the midterm and the final exams for the Z section will be identical to problems given on the exams for the other sections. The grading curve for the Z section will be based on the grading curve used for the other sections – which may result in a deviation in course grades from the Dean’s recommended grade curve.
Add/Drop Policy
This course also offers sections (A, B, and D) that will not be using Calculus. We encourage students to try out the Z section if it might be a good fit. You may switch into the other sections up until
October 21, 2016. After October 21, students may not switch into or out of the Z section.
To switch sections, please email Joseph Solomon (joseph_solomon@hks.harvard.edu), with the sections you are switching between and the date you will first attend the new section. You may NOT switch among the B, C and D sections. You may “try out” the other section for one class without sending this email; simply attend that section for one class.
If you do switch sections, grades will transfer from one section to the other. Problem set grades will transfer fully. However, you must submit any problem sets to the section for which you are currently registered (i.e. your original section if you have not yet emailed Joseph Solomon to formally switch). If you switch after the midterm, your midterm in your old section will count only 20% with the remaining
20% weight being transferred to the final exam.
Requirements
The formal course requirements are: completion of nine problem sets, two discussion questions, a midterm examination, and a final examination. The problem sets and discussion questions will count for 10 percent of the final grade, the midterm will count for 40 percent, and the final for 50 percent. The examinations will be “inclass”; books and notes cannot be consulted during examinations. Note that the midterm will be held on Wednesday, October 19, from 10:15 to 11:30 AM for all sections. The final exam will be held on Monday, December 12 from 3:00 PM to 6:30 PM for all sections. The final exam will be cumulative. Please check your calendars as soon as possible and avoid any scheduling conflicts for the midterm and the final. We WILL NOT schedule makeup exams except for students with documented dire emergencies.
A problem set will be assigned (and due) almost every week. Problem sets will give you handson experience with the techniques and concepts taught in the course. It will be extremely difficult to perform well in the midterm and final unless you devote time (about 6 to 8 hours per week) to working out these problems. The problem sets will be graded on the checkplus/check/checkminus basis, which will correspond to 1, 2, or 3 points out of 3 points total per problem set. Each problem set will count for one point of the final grade (for a total of 8 points plus two freebie points that we generously allot to all students). Problem sets are due at the beginning of class on the due date. If a problem set is not turned in by this time, it is considered late and there is no credit for late assignments. Class participation is strongly encouraged, but will not be graded.
Small groups of students (no more than 4) are STRONGLY encouraged to work together on the problem sets. However, problem solutions must be written independently by EACH of the students in your small group. This is to ensure that what you turn in reflects your own understanding of how to do the problems. In addition, you must indicate the name of the students in your group at the top of your solutions. Answer sheets will be posted on the class website shortly after each problem set is turned in.
The letter grade that will appear on your transcript will be determined by the sum of the midterm, final, and problem set numerical grades (minus any adjustments; see section below on tardiness). We will rank all students across all sections from highest to lowest grade, and use the (more generous) Dean’s recommended grade curve to determine the letter grade. The curve is as follows: 15% A's, 25% A, 35% B+, 20% B, and 5% B or less.
Across this course, you are expected to abide by the University policies on academic honesty and integrity as given in the Student Handbook. Violations of these policies will not be tolerated and are subject to severe sanctions up to and including expulsion from the university.
Class Logistics:
Our past experience suggests that student use of electronic devices can be very disruptive to the flow of the class (real world example from the past: a student texting while sitting in the front row). As a result, no mobile phones, tablets, PDAs, or laptops may be used in class. We will, of course, make whatever exceptions are necessary if there is a documented need.
Discussion Questions
We provide a list of discussion questions for six of the lectures for the course, starting with Lecture 5 on Wednesday, September 14. Each student is required to provide written answers to two of these questions prior to the relevant lecture over the course of the semester. These questions are designed to prompt detailed reflection about the subject of these lectures as well as to promote incisive conversations during those lectures. We will ask students to sign up for discussion questions during the second week of class.
Each written answer to a discussion question should be on the order of 2 to 3 paragraphs (12 written pages) and should be submitted to the course website by 8 pm the day before the relevant lecture. These answers will be graded on a “Check Plus/Check/Check Minus” scale. Especially interesting answers will be referenced in class, typically with attribution – the goal is to stimulate discussion, not to embarrass anyone for expressing an honest viewpoint.
Readings
The textbook for this course is Microeconomics: Theory and Applications with Calculus by Jeffrey M. Perloff. The book is on reserve at the HKS library and can be purchased at the Coop.
The exams will be based primarily on the material covered in lectures and on the problem sets. Professor Avery has also written a set of notes for this class to augment the material covered in class; these lecture notes will be available on the course webpage.
Each lecture will be delivered with use of the document camera. Professor Avery will start with partly completed slides and will add additional material to the slides during the course of the lecture. The partly completed slides for each class will be posted (for the entire semester) on the course webpage.
In previous years some students indicated that they did not read the textbook very much while others found it to be helpful. The problems on the problem sets are original, but we also provide a list of “recommended” problems (for most lectures) from the Perloff text for students seeking additional practice problems. You may wish to assess your propensity to rely on a textbook before purchasing one. You may also wish to consider the use of an alternative textbook. Nearly every microeconomics textbook covers the topics we will talk about in class, so you should feel free to use any alternative textbook that uses calculus and seems appropriate to you, such as:
Intermediate Microeconomics with Calculus by Hal Varian.
Introduction to Economic Analysis by Preston McAfee (free online, legally).
COURSE OUTLINE AND READINGS
UNIT 1: Supply and Demand (Classes 1 to 4)
1. Thinking at the Margin
Optional Reading: Perloff, Calculus Appendix, A1 – A4
Viscusi, W. Kip and Josepah Aldy, “The Statistical Value of a Life,” Journal of Risk and Uncertainty, 2003. http://scholar.harvard.edu/files/jaldy/files/valueofstatisticallife.pdf
2. Supply and Demand, Introduction to Comparative Statics Analysis
Perloff, 2.1–2.5, Lecture Notes Chapter 1
3. Policy Applications of Supply and Demand
Perloff, 2.6–2.8, Lecture Notes Chapter 2
4. Trade: Quotas and Tariffs
Perloff, 9.59.6, Lecture Notes Chapter 3
UNIT 2: Theory of the Consumer (Classes 5 to 9)
5. The Consumer Problem
Perloff, 3.13.4 (p. 5881), Lecture Notes Chapter 4
6. Income and Substitution Effects
Perloff 3.4 (p. 8188), 4.14.3, Lecture Notes Chapter 4
7. The Consumer Price Index
Perloff, 4.4, 5.2, Lecture Notes Chapter 6
Optional Readings: Boskin, Michael J., et al. 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living." Journal of Economic Perspectives, 12(1): 3–26.
http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.12.1.3
Munnell, Alicia and Anqi Chen, 2015, “Do We Need a Consumer Price Index for the Elderly?”
http://crr.bc.edu/wpcontent/uploads/2015/10/IB_1518.pdf
8. The LaborLeisure Problem and the Earned Income Tax Credit
Perloff, 5.5, Lecture Notes Chapter 7
Optional Readings: Liebman, Jeffrey, 1998. “The Impact of the Earned Income Tax Credit on Incentives and Income Distribution,” http://www.ksg.harvard.edu/jeffreyliebman/tpaeeitc.pdf
Chetty, Raj and Emanuel Saez, 2013. “Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients.” American Economic Journal: Applied Economics 5(1): 1–31. http://eml.berkeley.edu/~saez/chettysaezAEJ13EITC.pdf
9. Introduction to Behavioral Economics
Optional Readings: Schelling, Thomas, 1982. “Ethics, Law and the Exercise of SelfCommand,” Tanner Lectures at the University of Michigan, http://tannerlectures.utah.edu/_documents/atoz/s/schelling83.pdf
Sunstein, Cass and Richard Thaler, “Libertarian Paternalism is not an Oxymoron”, University of Chicago Law Review, 2003 http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1184&context=public_law_and_legal_theory
UNIT 3: Theory of the Firm and Competitive Equilibrium (Classes 10 to 15)
10. Producer Theory
Perloff, chapter 6, Lecture Notes Chapter 8
11. Profit Maximization and Competitive Supply
Perloff, chapter 7, Lecture Notes Chapter 9
12. Pareto Optimality, Equilibrium and Negotiation
Perloff, 10.110.3, Lecture Notes Chapter 10 (Chapter 11 very optional)
13. International Trade Revisited
Perloff, Chapter 9.19.4, 10.410.5, Lecture Notes Chapter 12
14. Introduction to Market Failure. Monopoly.
Perloff, Chapter 11. Lecture Notes Chapter 13
15. Price Discrimination and Regulation.
Perloff, 12.112.3 Lecture Notes Chapter 14
Optional Reading: “Pricing the Surge,” The Economist, March 29, 2014
http://www.economist.com/news/financeandeconomics/21599766microeconomicsubersattemptrevolutionisetaximarketspricingsurge
UNIT 4: Market Failures and Policy Responses (Classes 16 – 24)
16. Oligopoly.
Perloff, 14.114.5 Lecture Notes Chapter 15
17. Externalities
Perloff, 17.117.7
18. Prisoner’s Dilemma; Basics of Game Theory.
Perloff, 13.113.2 Lecture Notes Chapter 16
19. Dynamic Games and Negotiation Analysis
Perloff, 13.3 Lecture Notes Chapter 17
Optional Reading: Nason, Jason and Charles Plosser, “Time Consistency and Credible Monetary
Policy After the Crisis,” Philadelphia Federal Reserve Bank Business Review, 2012.
20. Adverse Selection and Lemons
Perloff, Chapter 18.118.3 Lecture Notes Chapter 18
21. Signaling
Perloff, 18.418.5 Lecture Notes Chapter 19
22. Moral Hazard
Perloff, 19.119.4 Lecture Notes Chapter 20
23. Thomas Schelling and Microeconomics Lecture Notes Chapter 21
Optional Readings: Myerson, Roger B., 2009. “Learning from Schelling’s Strategy of Conflict,” http://home.uchicago.edu/rmyerson/research/stratofc.pdf
Schelling, Thomas, 1978. Micromotives and Macrobehavior, ch. 3. (available on reserve)
API101Z
Fall 2016 Schedule of Lectures and Assignments
Class

Date


Topic of Discussion


Assignment due

1

Wed., Aug 31


Thinking at the Margin










Mon., Sept. 5


NO CLASS: LABOR DAY



2

Wed., Sept. 7


Organic Apples: A Market Simulation



3

Fri., Sept. 9


Policy Applications of Supply and Demand



4

Mon., Sept. 12


Trade: Quotas and Tariffs


PS #1 due

5

Wed., Sept. 14


Consumer Theory



6

Mon., Sept. 19


Income and Substitution Effects


PS #2 due

7

Wed., Sept. 21

 The Consumer Price Index 


8

Mon., Sept. 26


The Labor Leisure Model


PS #3 due

9

Wed., Sept. 28


Introduction to Behavioral Economics



10

Mon., Oct. 3


Producer Theory


PS #4 due

11

Wed., Oct. 5


Profit Maximization and Competitive Supply


















Mon., Oct. 10


NO CLASS: COLUMBUS DAY

















12

Wed., Oct. 12


Pareto Optimality, Equilibrium and Negotiation Analysis



13

Mon., Oct. 17


General Equilibrium and International Trade


PS #5 due








Wed., Oct. 19


MIDTERM EXAM for ALL sections



14

Mon., Oct. 24


Monopoly Theory



15

Wed., Oct. 26


Price Discrimination and Regulation



16

Mon., Oct. 31


Oligopoly Theory


PS #6 due

17

Wed., Nov. 2


Externalities



18

Mon., Nov. 7


Game Theory and the Prisoners’ Dilemma


PS #7 due

19

Wed., Nov. 9


Dynamic Games and Negotiation Analysis



20

Mon., Nov. 14


Adverse Selection and the Market for Lemons



21

Wed., Nov. 16


Signaling Models



22

Mon., Nov. 21


Moral Hazard


PS #8 due




Wed., Nov. 23


NO CLASS: THANKSGIVING









23

Mon., Nov. 28


Thomas Schelling and Microeconomic Theory


PS #9 due

24

Wed., Nov. 30


Applying and Extending Microeconomic Models









Note: Problem sets will be handed out a week before and returned a week after they are due.
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