the players and the goals two types of consumers non-smokers (eat pizza)

The Players and the Goals

Two types of consumers

• Non-smokers (eat pizza)

• Smokers (eat pizza and smoke)

Consumers’ goal: Maximize utility

The Players and the Goals

Two types of firm

• Pizza firms make and sell Pizza

• Cigarette firms make and sell Cigarettes

Each firm’s goal: Maximize profit

Profit = Ending $

Objects

= 1 Cigarette

= 1 Pizza

= 1 dollar

Pizza

$

Cigarette

Phases of Play

1.Goods market round

Non-smokers buy Pizza from Pizza firms for $.

Pizza

$

Phases of Play

1. Goods market round

Smokers buy Pizza from Pizza firms for $, and Cigarettes from Cigarette firms for $.

Pizza

$

Cigarette

Phases of Play


The catch: Second hand smoke is annoying to non- smokers.

Smoker #1’s second hand smoke annoys Non-smoker #1.

Smoker #2’s second hand smoke annoys Non-smoker #2.

Etc.

Phases of Play


Smokers

Utility = (Cigarettes + 1) (Pizza)

Non-smoker #1

Utility = Pizza – Smoker #1’s Cigarettes

Non-smoker #2

Utility = Pizza – Smoker #2’s Cigarettes

etc. for all Non-smokers.

Utility and Profit Round

1. Non-smokers report Pizza purchased.

2. Smokers report Pizza and Cigarettes purchased.

3. Pizza firms report ending cash.

4. Cigarette firms report ending cash.

Trading Rules

Firms must remain in their seats.

Firms display cards indicating their ask prices.

Consumers may only purchase 1 unit of product at a time.

Runner purchases one unit, takes it to manager, goes back and purchase another unit, etc.

Manager calculates impact on utility of hiring one more product of each type.

Ready to begin…

Goods Market Round

Non-smokers buy Pizza for $.

Smokers buy Pizza and Cigarettes for $.

Non-smoker #n

Utility = Pizza – Smoker #n’s Cigarettes

Smokers




2. Smokers report Pizza and Cigarettes purchased.



New Rule

Non-smokers have successfully lobbied the government to outlaw smoking. Cigarette firms no longer exist.

Ready to begin…

Goods Market Round


Smokers buy Pizza and Cigarettes for $.

Non-smoker #n

Utility = Pizza

Smokers

Utility = Pizza



2. Smokers report Pizza purchased.


New Rule

Smokers may purchase the right to smoke from Non-smokers.

= 1 smoking voucher (each)

1 smoking voucher entitles the smoker to smoke 1 cigarette.

New Rule

Smokers may purchase the right to smoke from Non-smokers.

Pizza

$

Smoker #1 may buy vouchers only from Non-smoker #1.

Smoker #2 may buy vouchers only from Non-smoker #2.

etc.

Ready to begin…

Goods Market Round


Smokers buy Pizza, Cigarettes, and vouchers for $.

Smokers


Non-smoker #n

Utility = Pizza – Smoker #n’s Cigarettes



2. Smokers report Pizza, Cigarettes, and vouchers purchased.



Results…

The experiment simulated three conditions

1. Undefined rights

No one owned the air.

2. Non-transferable rights

Non-smokers owned the air, but they could not sell the air to smokers.

3. Transferable rights

Non-smokers owned the air and could sell the air to smokers.

Non-Smokers' Utilities

0

10

20

30

40

50

60N

on-S

mok

er #

1

Non

-Sm

oker

#2

Non

-Sm

oker

#3

Non

-Sm

oker

#4

Non

-Sm

oker

#5

Non

-Sm

oker

#6

Non

-Sm

oker

#7

Non

-Sm

oker

#8

Non

-Sm

oker

#9

Non

-Sm

oker

#10

Non

-Sm

oker

#11

Non

-Sm

oker

#12

Non

-Sm

oker

#13

Non

-Sm

oker

#14

Non

-Sm

oker

#15

Non

-Sm

oker

#16

Undefined Rights Non-transferable Rights Transferable Rights

Smokers' Utilities

0

5

10

15

20

25

30

35

Sm

oker

#1

Sm

oker

#2

Sm

oker

#3

Sm

oker

#4

Sm

oker

#5

Sm

oker

#6

Sm

oker

#7

Sm

oker

#8

Sm

oker

#9

Sm

oker

#10

Sm

oker

#11

Sm

oker

#12

Sm

oker

#13

Sm

oker

#14

Sm

oker

#15

Sm

oker

#16

Undefined Rights Non-transferable Rights Transferable Rights

Average Utility (smokers and non-smokers combined)

0

2

4

6

8

10

12

14

16

18

Und

efin

ed R

ight

s

Non

-tra

nsfe

rabl

eR

ight

s

Tra

nsfe

rabl

eR

ight

s

Pizza Consumed

0

100

200

300

400

500

600

Und

efin

ed R

ight

s

Non

-tra

nsfe

rabl

eR

ight

s

Tra

nsfe

rabl

eR

ight

s

Cigarettes Consumed

0

5

10

15

20

25

30

35

40

45

50

Und

efin

ed R

ight

s

Non

-tra

nsfe

rabl

eR

ight

s

Tra

nsfe

rabl

eR

ight

s

Price of Pizza

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Und

efin

ed R

ight

s

Non

-tra

nsfe

rabl

eR

ight

s

Tra

nsfe

rabl

eR

ight

s

Price of Cigarettes

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

Und

efin

ed R

ight

s

Non

-tra

nsfe

rabl

eR

ight

s

Tra

nsfe

rabl

eR

ight

s

Civil Society vs. Political Society

The appropriate role for government is the protection of rights.

In a political society, people also rely on the government to restrict rights of others for the common good.

In a civil society, people freely choose not to exercise their rights in mutual exchange.


The problem with asking the government to restrict rights for the common good is that the government does not know what the appropriate level of restriction is.

When the government restricts markets, prices cannot emerge and so there are no value metrics on which to base decisions.


Example

Government provided primary and secondary education.

Common good = “high test scores” (as a proxy for quality of education)

Problem #1: With no prices, the appropriate level of quality is unknowable (zero is as bad as infinity).

Problem #2: Without a profit motive, there is no incentive to find the drivers of quality education. Instead, incentive is to find the drivers of revenue.


Question

With respect to public primary and secondary education, what drivers might impact educational quality?

Example: Student-teacher ratio

400

420

440

460

480

500

520

540

560

580

10 12 14 16 18 20 22 24

Student/Teacher Ratio, 2003

NA

EP

Sco

res,

200

3

8th Grade 4th Grade

Source: National Center for Education Statistics, U.S. Department of Education

Student-teacher ratio has no apparent impact on NAEP scores.

400

420

440

460

480

500

520

540

560

580

100 200 300 400 500 600 700 800

Student/School Ratio, 2003

NA

EP

Sco

res,

200

3

8th Grade 4th Grade

School size has no apparent impact on NAEP scores.


400

420

440

460

480

500

520

540

560

580

$2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $7,500

Instructional Spending per Pupil (2000$, State Cost of Living Adjusted), 2003

NA

EP

Sco

res,

200

3

8th Grade 4th Grade

Spending per Pupil has no apparent impact on NAEP scores.


400

420

440

460

480

500

520

540

560

580

$40,000 $45,000 $50,000 $55,000 $60,000 $65,000

Median Family Income (2000$, State Cost of Living Adjusted), 2000

NA

EP

Sco

res,

200

3

8th Grade 4th Grade

Median Family Income has no apparent impact on NAEP scores.



Maybe standardized test scores are the wrong proxy for quality.

What about the drop-out rate?

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

$2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500

Instructional Spending per Pupil (2000$, State Cost of Living Adjusted), 2000

Dro

po

ut

Rat

e (G

rad

es 9

-12)

, 20

00Spending per Pupil has no apparent impact on dropout

rate.


1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

40,000 45,000 50,000 55,000 60,000 65,000

Median Family Income (2000$, State Cost of Living Adjusted), 2000

Dro

po

ut

Rat

e (G

rad

es 9

-12)

, 20

00Median Family Income has no apparent impact on

dropout rate.



Does aggregating data at the state level hide information?

What happens if we look at the school district level?

1190

1210

1230

1250

1270

1290

1310

1330

1350

0 5 10 15 20 25 30

Student-Teacher Ratio

BS

T 0

8 (M

an

d R

co

mb

ined

) (2

000)

Each dot represents one school district in Minnesota.

1100

1150

1200

1250

1300

1350

$5,000 $7,000 $9,000 $11,000 $13,000 $15,000 $17,000 $19,000 $21,000 $23,000 $25,000

Cost per Student

BS

T 0

8 (M

an

d R

co

mb

ined

) (2

000)

Spending per pupil has no apparent impact on test scores.


Does nothing impact educational quality?

Performance is not random -- it is predictable.

500

510

520

530

540

550

560

500 510 520 530 540 550 560

8th Grade NAEP Scores, 1998

8th

Gra

de

NA

EP

Sco

res,

200

3For 8th grade, past NAEP scores predict future NAEP

scores.


510

515

520

525

530

535

540

545

550

555

560

420 430 440 450 460 470 480

4th Grade NAEP Scores, 2003

8th

Gra

de

NA

EP

Sco

res,

200

34th grade NAEP scores predict 8th grade NAEP

scores.



The fact that schools exhibit a consistency in performance indicates that performance is not random.

Performance drivers are unknown to the government because the government does not have the incentive and/or the ability to find them.


The achievement of a civil society requires two things:

1.A set of laws and institutions that define and protect property rights.

2.The freedom to act in the market place free from government coercion.


Without political freedom, economic freedom is unattainable. Without economic freedom, political freedom is meaningless.

the players and the goals two types of consumers non-smokers (eat pizza)

Documents

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nonsmokers report pizza

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n utility

hand smoke

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