Chapter 10

Chapter 10 is all about externalities, that is, the unintended consequences/benefits of various economic processes. With positive and negative externalities, society's interest in the market goes beyond the marketplace and instead extends to include the well-being of the bystanders affected indirectly. The book gives a few examples of positive and negative externalities, and it helped to paint a clearer picture in my head. Essentially, Mankiw argues that unlike a standard market, when externalities are involved, the government must consider its role and provide some sort of regulation to adjust the market for maximum social well-being. One possible way to regulate the market is through taxes on markets with negative externalities and subsidies on markets with positive externalities. These are called corrective taxes. With standard taxes in an efficient market with no externalities, the market operates inefficiently. But in a market with externalities, because consumers and producers don't take into account the effects of their actions on bystanders, the market isn't reacting at peak efficiency when it comes to societal well-being. Taxes and subsidies help shift the supply and demand curves in a more positive direction. Then, the positive gain usually outweighs the deadweight loss. But while taxes and subsidies are one way to handle externalities, they can also be handle through the marketplace. This is explained with the pollution permits example, and it was clear to see how again, the people with the most to lose valued the permits the most. Overall, this chapter was pretty easy, and I'd rate it 2/3 in terms of difficulty. 

Chapter 8: Taxation and Economic Welfare

Whereas chapter 6 was explaining how taxes affected the market, chapter 8 depicts how taxes affect economic welfare, and the two together form a bigger picture. An important thing to remember is that it doesn't matter who the tax is levied on, the determinant of who bears the tax burden between the producers and buyers depends on the elasticities of supply and demand. That leads us to learn that upon taxation, the losses to buyers and sellers from a tax exceed the revenue raised by the government. That fall in total surplus when a market outcome is distorted is called deadweight loss, as a result of people responding to incentives. It's also clear to see that the most dangerous effect of taxation is the canceling of transactions between buyers and sellers, resulting in no increase in revenue for the government (the intended effect) and a decrease in the size of the market. I got a little confused when Mankiw started talking about figure 4 and explaining that taxation caused a loss of benefit at every point on the graph, not because I didn't understand the concept, but because it wasn't depicted well on the graph. Mankiw's next lesson was pretty simple though, the greater the elasticities of supply and demand, the greater the deadweight loss of a tax. This makes sense because elasticity is a measure of how willing producers and buyers are to stay in the market in response to a price change, and a tax is nothing more than a price change. I also found it interesting that the labor tax debate can basically be boiled down to if one thinks the supply of labor is elastic or inelastic. All in all, this chapter was somewhat difficult at points, but nowhere close to a Stockman article. 2/3 for difficulty. 

Chapter 7: Consumers, Producers, and the Efficiency of Markets

This chapter is all about welfare economics, that is the study of how the allocation of resources affects economic well-being. We understand from previous chapters that the market tends to head towards equilibrium because of the laws of supply and demand, but now we understand better WHY that equilibrium is best for both the buyer and the seller. There's a whole lot about willingness to pay and consumer surplus, but the really interesting part is the use of the Beatles as example people. Coincidentally, listed in order of greatness. Surplus seems like a relatively simple concept as well, because more buyers will enter the market as the price goes down, and buyers whose willingness to pay was higher gain more individual consumer surplus. With the exception of heroin addicts, policymakers generally take into account buyer behavior when making policy decisions. Producer surplus works the same way as buyer surplus, except in reverse. Both of these concepts together combine to form "the Benevolent Social Planner". The hypothetical benevolent social planner is in charge of analyzing the total surplus of the market, which is the value of the goods to the buyers - the cost to the sellers. Overall, I couldn't really get into this chapter as I found it repeating some of the same concepts over and over again. I would rate this a 2/3 in terms of difficulty.

Article Review #2

Well, Stockman's at it again. Making economics more and more confusing, one obscure word at a time. Luckily, this article was a little bit easier than the last one, and I was able to determine what he was in fact talking about. Essentially, the point Stockman is trying to make is that the economy is not merely being retested as it was last October, but in fact heading towards another recession. When Stockman references "a bull market", he's talking about a market in which share prices are rising, encouraging buying. Stockman argues that this market, "battered and bloodied" so as to artificially remain a bull market, will finally "give up the ghost" and become a bear market in which prices fall, encouraging selling. Stockman also explains that the reason there has been the false sense of growth for so long is that their was hope for China as the great hope for expansion. But in the midst of the United States's quarter-trillion dollar capital outflow, it's clear that the market isn't expanding in the ways we would like it to. That, coupled with China increasing production of commodities, specifically steel, and the increase in supply will make it even harder for US suppliers to keep up. While I appreciate a lot of the points Stockman makes and agree with them too, I dislike how he presents them in such an arrogant, condescending way. Overall, I thought that the article was informative, but I would still rate it 3/3 in terms of difficulty.

Chapter 6: Supply, Demand, and Government Policies

Whereas the last two chapters examined the role of an economist as a scientist, chapter six delved into the role of an economist as a policy adviser. The first thing I found interesting in this chapter were the concepts of price ceiling and price floor because I had never put too much thought into how much influence the government often has over the market. Mankiw clearly opposes binding price ceilings, judging by how he argues against their restriction of the market early in the chapter. The examples confused me a little bit, but I understand the concept: the more restrictions, the less the free market principles and the invisible hand can guide the market towards prosperity. That seems to be the goal of this chapter: drill in the concept that binding price ceilings are bad for the economy and for free market values. Basically the same old lesson with price floors, except price floors lead to surpluses if they are binding. The most relevant part of this chapter was when Mankiw talked about the group that was most affected by minimum wage laws: the market for teenage labor. I had never thought about that before, and it's very interesting to think that the jobs I could hold throughout the rest of high school and in college could be dictated by the minimum wage laws. All in all, this chapter was not very difficult to read or understand. I would give it a 1/3 for difficulty.

Chapter 5

Where supply and demand seemed like an oversimplified way of measuring changes in market conditions, elasticity, which takes into account the magnitude of effects on the market, is a portal to a greater understanding of how the market really works. The key to understanding this chapter is to know the difference between elastic and inelastic goods, the former responding substantially to changes in price, and the latter responding only slightly to price changes. The factor of elasticity I found the most interesting was how the definition of the market had such a big impact on elasticity. The tighter the definition, the easier it is to find a substitute good. The toughest concept to remember is the difference between the five types of elastic/inelastic demand. I also enjoyed Mankiw breaking the fourth wall and talking directly to the reader about a trick to use on the next exam, very creative. I still need some time for the concepts to sink in though, it's a little more advanced than the last chapter. I'd rate this chapter a 2/3 in terms of difficulty, not too hard to understand. 

Article Review #1

When I wasn't spending time figuring out which thesaurus David Stockman used to make himself sound both obnoxiously intelligent and unquestionably biased, I read between the lines and learned a little bit about modern-day economics. Basically, the article examines the fault in the Goldman Sachs Financial Conditions Index, the lowering of interest rates, the Federal Reserve's mass printing of money, the lack of non-theoretical proof of economic growth, and the (non) effect of federal stimulus on household borrowing and spending. Stockman's main argument throughout the article is against the "Keynesian Chorus", who claims that federal monetary policy as of late has been too restrictive. Stockman claims that regardless of what 'real' interest rate (negative but still too tight) a corporate financial executive may have concocted, that thought never crosses the mind of any real-world borrowers. What they do think about, however, is how much debt they can afford to carry and their potential penalties based on their credit histories. The result of that thinking? Even though interest rates dropped to 0% in the wake of the recession, household debt has remained flat and has in fact decreased since 2008. What does that mean? All the federal monetary stimulus had no effect on household spending and borrowing. Stockman says all this to break down his main point at the end of the article, explaining the inflationary impact the lower rates have had in the "canyons of Wall Street". Stockman disputes that the interest rates have fueled the "third and greatest financial bubble of this century", going on to argue that if the government continues to heed the advice of the people who have let this bubble build up to this point, it will burst. My main question is, where is Stockman's evidence? Is it merely a process of elimination, because the growth hasn't been seen in the business or household sectors? Overall I'd rate this article 3/3 because Stockman's obtrusive language made it a difficult read on the first time through, but as I re-read it became easier to understand.