Robert Whaples and the Modern Principles

A blog on my teaching with Modern Principles of Economics by Tyler Cowen and Alex Tabarrok

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What Happens When Markets Go Rong

Posted by Robert Whaples on October 20, 2009

The main theme of the first month of my intro to econ class was “how markets work” — and when they work, it can be beautiful and sublime.   The theme during the past few weeks has been “What Happens When Markets Go Rong.”  (No typo there — when things go wrong, they really go rong.)   Cowen and Tabarrok’s textbook understands the power of markets at a deep level and this is what first attracted me to it.  How well do they handle the second topic?  If you’ve followed my postings, you know that C & T’s chapters on market power are very well wrought — showing that market power doesn’t always result in market failure and giving a well-rounded picture of cartels, for example.  The chapter on “Public Goods and the Tragedy of the Commons” uses a compelling example of a public good (asteroid deflection services), but in my opinion this chapter is too skinny — it needs a few theoretical graphs that the instructor can build on to make sure that students have a rigorous grasp of the concepts.

Last Wednesday before my students left for Fall Break, I covered Chapter 9 on “Externalities: When Prices Send the Wrong Signals.”  Once again the authors open with a compelling, but unexpected example — negative externalities from the overuse of antibiotics.  (I’ve never seen a text with so many medical examples — but after all the health care section is now over one-sixth of GDP.)  The coverage of Pigovian taxes/subsidies and the Coase Theorem are also good.  On Monday I followed up this chapter with a lengthy discussion of the economics of global climate change.  In light of the saturation attention given to this issue from kindergarten to high school, I think it’s important that students learn how this topic fits into our analysis of negative externalities.  Unfortunately, I haven’t found a textbook that gives the topic adequate attention.  Blithely drawing a graph of a negative externality is one thing, grappling with issues like discounting, uncertainty and the dollar-and-cents measurement of the marginal external costs AND benefits of rising levels of greenhouse gases is another.  In fact, I ended up spending all 50 minutes of yesterday’s class discussing these issues and economists’ struggles to empirically estimate the damages from GHG’s.  The consensus opinion among economists, to the surprise of many students who have been weaned on horror stories, is that these external costs are probably fairly small — about a quarter of economists think that rising levels of GHGs will be economically beneficial and the median position is that they will cause pretty small damages (less than 1 percent of GDP).

I ended up virtually skipping over Chapter 18, “Economics, Ethics, and Public Policy.” It’s another chapter that sort of teaches itself — hence little point in me trying to add value to it.  I would have liked more empirical content in the section on inequality — a good Lorenz Curve or two would give me a rigorous concept that I could test my students on.

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One Response to “What Happens When Markets Go Rong”

  1. Jim said

    “about a quarter of economists think that rising levels of GHGs will be economically beneficial”

    Economically beneficial to the USA, wasn’t it? That’s perfectly consistent with ‘economically catastrophic for some other parts of the world’. Shouldn’t global welfare be the criterion for evaluating the effects of global warming, especially given what an enormous chunk of GHG emissions the US is responsible for?

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