Microeconomic Theory II

This is the second course in a two-course core sequence in microeconomics. The objective of the sequence is to describe the fundamental economic justifications for policy intervention, as well as to understand how economic approaches to modeling decision-making can be useful for policy analysis. Substantively, this course develops and investigates the notion of “economic efficiency,” and how this concept informs the way economists evaluate policy. It develops the techniques necessary for understanding whether efficiency can be attained in a complex economy with many simultaneously operating markets. It then considers several economic challenges to the efficient operation of markets, and whether these can be resolved by private or public mechanisms. Specific examples of these challenges include market power, underproduction of public goods, over or underproduction/consumption of externalities, inefficiencies arising from asymmetric information, and how relaxing assumptions of rationality (i.e., “behavioral economics”) can aid policy analysts. Specifically, we will explore economic models of national and international security, pollution, climate change, insurance markets, and labor markets, and how the economic approach to policy analysis – focusing on incentives facing individuals – both structures discussions of when and how to craft policy interventions, as well as the likely impacts of existing policy.