Positive political economy
Economics, economic policy and public choice
This course introduces economics, economic policy and positive political economy to students completely new to the subject. The conversational yet precise style of this course is an excellent way of presenting the science of economics, economic policy and public choice to tomorrow's decision makers. The course is designed to provide students with a sound conceptual understanding of the subject using contemporary examples where possible. It stands out amongst all other introductory economics courses by stressing the fact that economic processes do not take place in isolation from social and political processes and by encouraging students to apply an economic way of thinking in their analysis of political processes. The course covers the most important topics in political economy while reflecting European economic structures and institutions and adapting the language and cultural references to a European audience. For instance, the euro is the basic currency referred to throughout the course, and case studies and examples largely refer to the European economy and EU policies. These features are apparent when dealing with the EU's common agricultural policy, external trade policy, competition policy, VAT, the euro and ECB monetary policy. By the end of the course, students should be able to understand the effects on markets of government policies such as a the establishment of a minimum price, a price ceiling, a quota, or a subsidy; the effects of taxation and the design of optimal tax systems, market failure (monopoly, externatilies, public goods) and ways to deal with it, macroeconomic data, economic growth, monetary policy, and fiscal policy. They should also be acquainted with the political conflicts related to economic policy and economic explanations of policy making.
1. Principles of positive political economy. The same government policy affects the welfare of different people differently. People act like rational economic actors in their political decisions. Economics, economic policy and public choice. Introduction to the scientific method. Why do people disagree about covid-19 restrictions? (Mankiw, ch. 1-2; Krugman, ch. 1-2). 2. Supply and demand. Quantity and price. Marginal utility and marginal cost. Movements along the curve vs curve shifts. The market equilibrium. Why is the current crisis different from the previous one? (Mankiw, ch. 4; Krugman, ch. 3). 3. Elasticity and its applications. Can a good harvest be bad for farmers? (Mankiw ch. 5; Krugman, ch. 5). 4. Supply, demand, and public policies. Price controls. Was it a good idea to raise the minimum wage in Spain in 2020? Is rent control a good idea for mayors? (Mankiw, ch. 6, pp. 111-120; Krugman, ch. 4). 5. The three effects of a tax: tax revenue, tax burden and the deadweight loss of taxation. Elasticity and tax incidence. Optimal tax systems: sufficiency, efficiency and equity. A reduced VAT rate for food or a reduced income tax for IT professionals? (Mankiw ch. 6: 120-128, ch. 8; Krugman, ch. 5). 6. International trade and protection. Tariffs. Quotas. Non-tariff barriers. Winners and losers from trade. Arguments for protection. How protectionist is the EU? (Mankiw ch. 3+9). 7. Mid-term review. Welfare economics vs positive political economy. Consumer surplus, producer surplus and tax revenue. Does it make sense to aggregate national well-being? (Mankiw, ch. 7). 8. Externalities. Pigouvian taxes, quotas and tradeable pollution permits. Rivalry and excludability: private goods, public goods and common resources. Club goods. What's the optimal size of our class? (Mankiw ch. 10-11; Krugman, ch. 9). 9. Monopoly. The costs of monopoly. Economies of scale and natural monopolies. EU competition policy. Should the EU allow the creation of European champions? (Mankiw ch. 13-15; Krugman, ch. 8). 10. Measuring the macroeconomy. Production, growth, employment, inflation, income distribution. Is Ireland the most developed country in the EU? (Mankiw ch. 23-24; Krugman, ch. 11). 11. Economic growth. The Harrod-Domar model. The neoclassical growth model. Conditional convergence. Why does Romania grow faster than Germany? (Mankiw, ch. 25; Krugman, ch. 13). 12. Money and monetary policy. The monetary system. The money multiplier. Money growth and inflation. The inflation tax. Who creates money in Europe? The Covid-19 pandemic and a digital currency for the ECB? (Mankiw ch. 29-30; Krugman, ch. 16-17). 13. Fiscal policy. The multiplier effect. Crowding out. Ricardian equivalence. How much is the government spending multiplier? The political business cycle: partisan and opportunistic. The Stability and Growth Pact. (Mankiw ch. 33-34; Krugman, ch. 15). 14. Introduction to public choice. The median-voter theorem. The principal-agent problem. Exit, voice and loyalty.
Mankiw, N. G. (2020). Principles of economics, 9th ed. Cengage learning. Previous editions of the book are also OK. Alternative/supplementary reading: Krugman, P. & Wells, R. (2019). Essentials of economics, 5th ed. New York: Worth.