Wondering why economists have not predicted serious financial crises? Shocked by economic assumptions of human behavior as self-centered and focusing only on what can be measured? Asking yourself if there are no sensible economic alternatives to free markets? Then you are at the right place to learn economics! This is the first online course that teaches economics from a pluralist perspective. Economic pluralism means that a plurality of theoretical and methodological viewpoints is regarded as valuable in itself and is simply the best way in which economics can make progress in understanding the world. This MOOC will illustrate economic pluralism not only in substance but also in form. You will see not only me, a Professor of Economics, but also a pop-up Prof of our business school, who illustrates the actor perspective of firms, government and civil society. And you will meet an online student, based in Greece, who will help you through the tutorial videos in which I will explain key concepts, tools and techniques. I will not limit myself to the dominant theory, as almost every other course does. Instead, I will introduce you to four very different economic theories for the whole set of standard topics in microeconomics and macroeconomics. The theories are presented every time from broad and more interdisciplinary to narrow and more mathematical. The four theories that I like to introduce you to are Social Economics, Institutional Economics, Post Keynesian economics and, at the very end of each topic, Neoclassical Economics, for the special case of ideally functioning markets. But not everything is different in this course. Like every economics course, it includes numbers, diagrams, tables, equations, and some calculations. Why would you go through the effort of learning the basics of four theories instead of one? Because it will help you to see why many economists cannot predict crises, whereas others can see signals but are often not being listened to because they do not belong to the dominant school of thought. It will also enable you to see that it is just one theory claiming economic agents to be self-centered and focusing on the measurable only. Other economic theories go well beyond these limitations. And, finally, the pluralist approach will provide you with policy alternatives to neoliberalist policies promoting free markets. The objective of this course is twofold. First, to enable you to understand different economic viewpoints, linked to important traditions in economic thought, and basic economic concepts belonging to these theoretical perspectives. Second, to enable you to do some basic economic calculations that are important in economic life, such as calculating an inflation rate, and in economic policies, such as estimating the rough gains from trade for both trading partners, and in economic arguments, such as in calculating utility maximization with given prices and budgets. I hope you will enjoy the course!
Public Goods and Commons
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En provenance du cours de Erasmus University Rotterdam
Introduction to Economic Theories
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Rencontrer les enseignants
Irene van StaverenProf. dr.
International Institute of Social Studies (ISS)
Rob van TulderProf. dr.
Department of Business-Society Management, Rotterdam School of Management
Maria DafnomiliPhD researcher
International Institute of Social Studies
Welcome to the presentation on public goods and commons.
This video goes deeper into the public goods role of the state and
its limitations.
Remember from the previous video that public goods are goods for
which no one can technically be excluded from enjoying their benefit.
The benefits cannot be collected by the provider, for example in street lighting.
The investment costs are often very high and public goods are non-rivalry.
Meaning that the street light that I consume is not taking any away from what
is available for you.
And there is non-excludability, meaning that we
cannot exclude people from benefiting from the street light on public roads.
But, there are also disadvantages,
as compared to private goods provided by the market.
These disadvantages are inefficiency, free riding,
and under supply due to a lack of public resources to fund a public good.
Next to public goods, we distinguished merit goods
which are regarded as desirable for anyone, for example hospitals.
And club goods, which are non-rival but excludable,
such as playing at a tennis club.
Domestic public goods are financed with tax money, social insurance, or fees.
Economic theories differ in how they solve the negative side effects of public goods.
In particular, free riding and inefficiency due to monopoly power.
Social economics points at group norms and group pressure for noncompliance.
And benchmarking to prevent low quality services, or high cost.
Institutional economics proposes subscriptions.
Whereas post-Keynesian economics uses the opportunity cost method to prevent
under supply or inefficiency.
In neoclassical economics, there is no solution to free riding.
Why not?
Because of the what's in it for me assumption of all behavior.
That is why neoclassical economics has two methods to reduce public spending
on public goods.
One of these is using the willingness to pay method
to determine the level of spending on a public good.
People are asked how much they would be willing to spend on a certain public good
such as a park.
The optimum amount then is where the marginal revenue, MR,
of enjoying the park.
Equals the marginal cost, MC, of building and
maintaining the park, all expressed in money terms.
Do you remember these terms from the video about firms and markets of week three?
If not, you may want to review those videos.
The other method to reduce tax spending on public goods is shown with the so
called Laffer curve, from the economist Arthur Laffer.
I will show it on the next slide.
The Laffer curve nicely shows that when the government increases the tax
rate tax revenue goes up.
But only up to a certain point labeled T*.
After this optimum, the top of the hyperbole,
a further increase in the tax rate will encourage tax evasion or fraud.
Did you know that in the 1970s,
the highest income tax rate in the United States was 70%?
Today it seems people do not accept such rates anymore.
Have people become more selfish today?
To be honest I don't know.
I'm simply an economist.
It is institutional economics which points at the need of global
governance institutions to develop global public goods.
Post Keynesian economics goes further.
And proposes international treaties and a global financial
transaction tax going into a fund to finance global public goods.
What if the world does not manage to provide these global public goods?
Well, post-Keynesian economics shows you the cost of this.
For example, the costs of doing nothing about financial
instability are estimated to be $50 billion US.
Whereas the cost of preventing this is only $300 million US.
For climate stability the cost of inaction is $780 billion.
Whereas the cost of preventing climate instability amounts to only $125 billion.
So it seems smart to provide this public good, right?
You see economics is easy.
It is politics which is difficult.
This brings us to the concept of commons or common-pool resources.
These are collective goods, used, owned, preserved, or
protected by local collectives, often communities.
The best known theory of common-pool resources is an institutional theory
developed by Nobel Prize winning economist Elinor Ostrom.
She characterized the institutional environment of commons
with three key features.
High risk of resource depletion, context methods,
and communities developing resource governance rules by themselves.
In social economics commons are seen as not so much governed by formal rules but
by social norms, based on trust in communities.
The threat of this is obvious, migration.
Both the inflow of outsiders who do not share the group norms and
the outflow of insiders.
So that the group enforcing the social norms becomes smaller.
As I explained before neoclassical economics has no answer to free
riding on public goods.
And the same counts for married goods and commons.
And by now you know why.
Because the theory assumes that economic agents are selfish.
Leading to what the 18th century
economist Thomas Malthus called the tragedy of the commons.
Fishermen will each individually maximize their catch.
Thereby collectively leading to a quick depletion of the fish in a lake, for
example.
So, there is no solution to the tragedy of the commons.
But neoclassical economics has an indirect policy response to this problem.
By turning a common good into a private good through privatization of the commons.
This requires dividing the common pool resource into
individual pieces with individual property rights.
The problem is that this often leads to exclusion of some groups.
Look for example at the absence of women's names on lands titles
in many lands distribution projects in developing countries.
This is the final slide of this presentation.
It summarizes the four types of goods that I have discussed.
I use two axes to locate these types in a two dimensional figure.
The y-axis shows the degree of excludability.
Whereas the x-axis shows the degree of rivalry.
Let's first look at allocation of a pure private good, what we can buy in shops.
It has a high degree of excludability.
Every apple I eat you cannot eat as well.
It also has a high degree of rivalry.
When I buy ten kilos of apples on the local market there is less available for
you to buy.
For the club good there is little rivalry but
we cannot exclude others to enjoy it once they have access.
And for common-pool resources there is huge rivalry, for
example for fishing on a lake, but low excludability.
We cannot prevent more fishing boats to go on the lake and throw out their nets.
And so pure public good is the one located closest to the origin of
the diagram, low excludability and low rivalry.
Once the streets lights are on we all benefit.
Unless some of us had hoped for darkness to enjoy looking at the stars.
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