Criteria for Economic Policy

In writing the essay for the exam you'll need to judge the consequences of taking a certain course of action. To this end, the following criteria are useful:

• Efficiency: Policy produces what people want at the least possible cost. As a result of economic change some people win and others lose. How can this be measured? Possible measure: "Does the money value of the resulting gain exceed the value of the resulting losses?"
  
  
• Equity: What is fair and unfair? Programs like rent control and social welfare programs try to create 'fairness'.
  
  
• Economic Growth: increase in the total output of the economy.
  
  
• Stability: avoidance of large fluctuations in inflation, unemployment, etc.
  
  
• Sustainability: Will this policy provide the best outcomes for the human and natural environments both now and into the indefinite future.

 

Other concepts of interest incude:

 

• cost-benefit analysis
  
  
• opportunity costs
  
  
• externality


• asymmetric information



• principal-agent problem



• win-win or zero sum game



• the incentive-compatibility issue has highlighted the problems of



• moral hazard and
             
• adverse selection
  


• unintended consequences
  


• conflict of interest  (pump and dump)
  


• crony capitalism
  


• transparency
  


• Tragedy of the Commons
  


• parable of the broken window



• crowding out



• free rider problem



• TANSTAAFL



• feedback (positive, negative, downward spiral)



• comparative advantage



• inequity aversion



• Pareto efficiency,



• Kaldor-Hicks efficiency,



• marginalism