Positive political economy

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Economics, economic policy and public choice

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Live dates: 
Monday, 15 February 2021 to Sunday, 30 May 2021

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Aims and scope: 

This course introduces 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. Three principles of political economy. Thinking like an economist. Introduction to the scientific method. Economics, economic policy and public choice. 2. Supply, demand, and public policies. Price controls. Quotas. Why is food more expensive in the EU than in the US? Why can't you find a new GPU at MSRP? Why do ZARA clothes have a higher list price in Venezuela? Why do they sell "milk drinks" in Venezuelan supermarkets? Should we raise the minimum wage? 3. Market efficiency and the cost of taxation. The three effects of a tax. The deadweight cost of taxation. Optimal tax systems. Tax incidence. Sufficiency, efficiency and equity. A reduced VAT rate for food? A reduced income tax for IT professionals? 4. The efficiency of free trade and the cost of protection. Tariffs. Quotas. Non-tariff barriers. Winners and losers from trade. Arguments for protection. How protectionist is the EU? 5. Preferential trade agreements. Trade creation. Trade diversion. Would Romania benefit more from Moldova's EU integration than Moldova itself? 6. Externalities. Pigouvian taxes. Quotas. Tradeable pollution permits. Public goods. Private goods. Rivalry. Excludability. Club goods. 7. Monopoly. The costs of monopoly. Economies of scale and natural monopolies. EU competition policy. Should the EU allow the creation of European champions? 8. Measuring the macroeconomy. Production, growth, employment, inflation, income distribution. Is Ireland the most developed country in the EU? 9. Money and monetary policy. Inflation. The inflation tax. The money multiplier. Who creates money in the EU? The Covid-19 pandemic and a digital currency for the ECB? 10. 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. 11. Economic growth. The Harrod-Domar model. The neoclassical growth model. Conditional convergence. Why does Romania grow faster than Germany? 12. Introduction to public choice I. Democracy. Spatial models of voting. The median-voter theorem. The paradox of voting. The subsidisation of bias. Why are rich people so powerful in a democracy? Should we regulate electoral and lobbying campaign spending? Why is online voting not allowed? 13. Introduction to public choice II. Bureaucracy. Agenda setting. The principal-agent problem. Agency loss. Uncertainty and preferences. Delegation and control. Why do some delegates get more powers than others? 14. Introduction to public choice III. The theory of clubs. The Exit-Voice-Loyalty (EVL) game. Structural dependence of the state on capital. Selectorate theory. Why are there so few highways built in Romania? Why is bad behaviour almost always good politics?

Indicative reading: 

Mankiw, N. G. (2020). Principles of economics, 9th ed. Cengage learning. Previous editions of the book are OK.

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