Category: Economics 10e: Ch 12

The economist Joseph Stiglitz won the Nobel Prize for Economics in 2001. Along with George Akerlof and Michael Spence, he worked out a theory of information asymmetry: a situation where both parties in a transaction have different levels of information. Could this theory have some relevance as an explanation of the current financial crisis?

In praise of …..Joseph Stiglitz Guardian (8/10/08)
Stiglitz lecture on financial crisis available online University of Manchester (13/10/08)

Questions

1. Explain what is meant by information asymmetry.
2. Explain how information asymmetry can lead to markets working imperfectly.
3. Discuss the extent to which the theory of information asymmetry may be relevant as a partial determinant of the current financial crisis.

Hayek, through his book the ‘Road to Serfdom’ became one of the founding fathers of the market economic system that we have adopted as the principal method of organising economic activity. However, like all neo-liberal economists, his views and recommendations have come under increasing scrutiny in the current financial crisis.

Faith. Belief. Trust. This economic orthodoxy was built on superstition Guardian (6/10/08)
Dangers of worshipping false god of self-regulating markets Irishtimes.com (3/10/08)

Questions

1. Write a short paragraph setting out the key arguments in Hayek’s book ‘The Road to Serfdom’.
2. Assess the importance of confidence in an economic system. To what extent is a lack of confidence a ‘self-fulfilling prophecy’?
3. Discuss the extent to which Hayek’s work influenced the adoption of neo-liberal economic policies.

The article linked below looks at the extent to which economic downturn and rising inequality are likely to affect crime levels in the UK. Traditionally the view has been that an economic downturn will raise crime, but is it necessarily the downturn that is causing the increased crime?

Consumed by crime Guardian (24/9/08)

Questions

1. Explain why an economic downturn may lead to increased levels of crime.
2. Discuss the extent to which deregulation of markets may have exaggerated the relationship between crime and the level of economic growth.
3. Assess the view espoused in the article that “a culture obsessed with material goods” and “competitive individualism” have led to stronger link between crime and economic growth.

Shell have announced record profits of $27bn. This is the highest profit ever made by a European company and is only surpassed worldwide by the annual profits of another oil company ExxonMobil at $40bn. These high profits have led to calls for a windfall tax to be imposed on the oil companies and the articles below consider the likely impact of a tax of this nature.

Threat of windfall tax to energy companies is ‘legalised piracy’ Times Online (28/2/08)
Tax uncertainty a sure-fire killer Times Online (28/2/08)
Q&A: Windfall tax on Shell BBC News Online (31/1/08)
The great fuel folly Guardian (5/2/08)

Video

Windfall tax suggested for fuel profits BBC News Online (February 2008)

Questions

1. Using diagrams as appropriate, show the impact on the equilibrium level of price and output of Shell of a windfall tax being imposed on their profits.
2. Discuss the extent to which the high level of profitability of oil companies is determined by the oil price.
3. Analyse whether a windfall tax is an economically efficient form of taxation. What alternatives could a government consider that might be more efficient?

With oil prices over $100 a barrel and petrol prices over £1 per litre, it is difficult to imagine a county where the entire tank of a 4×4 can be filled for 42p, but Venezuela is just such a country. Not surprisingly, Venezuelans are resisting any attempt to change the level of subsidy that creates this situation.

Cheap and cheerful: Venezuelans cling for right to petrol at 42p a tank Guardian (18/1/08)

Questions

1. Using supply and demand diagrams as appropriate, show the impact of the Venezuelan fuel subsidy on the equilibrium price of petrol.
2. Assess the impact on economic efficiency of a subsidy on this scale.
3. Discuss the impact on the socially optimal equilibrium level of output of the Venezuelan fuel subsidy.