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Microeconomics for Public Policy (PP-601)

Prerequisites For this Course:

None

Text Book(s):

Pindyck, R, and Rubinfeld, D. Microeconomics. 8th Edition. Pearson Prentice Hall (PR)
Acemoglu, Laibson, D and List, Microeconomics, 2nd Edition (ALL)
Jeffrey M. Perloff, Microeconomics: Theory & Application with Calculus (JP).
Robert H. Frank, Ben S. Bernanke, and Hon-Kwong Lui), Microeconomics (FBL)
Gruber, Public Finance and Public Policy, 2nd Edition (JG)

Reference Book(s):

Friedman, Lee S. (2002), The Microeconomics of Public Policy Analysis, Princeton University Press (FL).
Banerjee, Samiran. Intermediate Microeconomics: A Tool-Building Approach. 1st Edition (BS)

Others:

Supplementary readings on various public policy topics will be provided periodically, each linked to core microeconomic principles. Areas of focus will include agricultural policy (wheat subsidies, food security, price supports), illustrating concepts of price controls, welfare distribution, and political economy; energy and utilities regulation (electricity pricing, fuel subsidies), highlighting market failure and subsidy incidence; and trade policy (tariffs, export promotion, competitiveness), tied to comparative advantage, efficiency, and rent-seeking. Other key areas include health and taxation (tobacco taxation, sin taxes), exploring externalities and corrective taxation; transport policy (public transport subsidies, regulation), emphasizing public goods and congestion externalities; education reform and healthcare policy, linked to human capital, externalities, market failure in insurance, and equity in access; and taxation and fiscal policy, focused on incidence, redistribution, and efficiency-equity trade-offs. Additional readings will address the informal economy (regulation, taxation, productivity), social protection and transfers such as BISP and Ehsaas (redistribution, targeting, incentive effects), investment and industrial policy (incentives, coordination failures, rent-seeking), labor market policies (minimum wage, employment programs, regulation), and environmental and climate policy (carbon taxes, pollution regulation, green subsidies). These readings will be integrated into lectures, quizzes, examinations, and problem-solving assignments. When a reading is labeled as “required,” it implies that you are accountable for reviewing the paper before the lecture. This entails reading the Abstract, Introduction, and Conclusions sections (although you are not obligated to read the entire paper) to address the following inquiries:

What is the primary research question addressed in the paper?
What methodology is employed to address this question (e.g. a quasi-experiment, regression, correlations, etc.)?
What are the principal findings presented in the paper?
What economic implications can be drawn from these findings?
While I do not anticipate you fully grasping a paper’s technical aspects before the lecture, I expect you to arrive at class well-prepared to engage in discussions regarding the assigned reading material.

Video lectures:

https://ocw.mit.edu/courses/14-01-principles-of-microeconomics-fall-

2018/video_galleries/lecture-videos/

Course Description

Welcome to PP-601: Microeconomics for Public Policy. This course introduces core microeconomic principles and applies them to public policy analysis. Topics include demand and supply, elasticity, consumer behavior, production and costs, market structures, labor markets, externalities, public goods, taxation, subsidies, and decision-making under uncertainty. By applying these concepts, Students will learn to assess market efficiency, identify market failures, and evaluate government interventions to improve resource allocation, equity, and welfare using real- world policy examples.

Course Objectives

Know the fundamental microeconomic concepts.
Know how market forces work and the impact of government policies on the market outcome.
Utilize economic efficiency as a criterion for assessing government interventions.
Recognize sources of market failure and propose suitable government interventions.
Understand why markets, in some situations, fail to deliver the best outcomes for society.
Identify governance bottlenecks that may limit government interventions in markets.

Learning Outcomes

By the end of this course, students will be able to:

Understand fundamental microeconomic principles and their application in public policy analysis.
Explain how demand and supply determine market outcomes and how government policies influence prices, quantities, and social welfare.
Analyze consumer behavior and firm production decisions to evaluate the effects of public policies.
Differentiate between market structures (perfect competition, monopoly, oligopoly) and assess their implications for efficiency and regulation.
Identify common sources of market failure, such as externalities, public goods, and information asymmetry, and propose effective government interventions.
Understand labor market functioning, including wage determination, discrimination, and the impact of labor policies.
Evaluate the economic effects of taxes, subsidies, and other interventions, balancing efficiency and equity considerations.
Apply concepts of risk and decision-making under uncertainty to the design and evaluation of public policies.

Lecture Plan

Session	Topic	Details	Readings	Activities
Module 1: Foundations of Microeconomics for Public Policy Duration: Week 1–2 Objective: Understand the core principles of microeconomics and how they shape public decision-making.
1	Why Microeconomics Matters for Public Policy	What is microeconomics? Micro vs macroeconomics: differences & relevance to public policy Positive and normative economics Scarcity, resources, and opportunity cost Trade-offs and marginal thinking Incentives in economics and policy design Cost-benefit analysis basics Market failures and government intervention: Brief overview	GM, Chapter, 1; ALL, Chapter 1	Assignment and Quiz
2	Individual Choice and Optimization under Constraints	Optimization: levels vs. marginal changes Budget constraints and trade-offs Opportunity cost revisited Rational decision-making framework Constrained optimization problems Application: Public budgeting—education vs health allocations in Pakistan Behavioral foundations of optimization Marginal analysis in cost-benefit decisions	PR, Chapter1 and ALL, Chapter 5
Module 2: Markets, Prices, and Policy Tools Duration: Week 3–5 Objective: Explore how markets work and how government policies affect prices, quantities, and welfare.
3	Demand and Supply: Foundations of Market Interaction	Law of demand and supply Demand curve: determinants and shifts Supply curve: determinants and shifts Market equilibrium: price and quantity Comparative statics and dynamics Price controls: ceilings and floors Policy case: Sugar pricing and rationing in Pakistan	PR, Chapter 2 ; GM, Chapter 4	Assignment & Quiz
4	Elasticities and Responsiveness of Markets	Price elasticity of demand and supply Income elasticity and cross-price elasticity Determinants of elasticity Tax incidence and burden sharing Policy relevance: Fuel pricing, tobacco taxes in Pakistan Application: Effect of taxes/subsidies on market outcomes	GM chapter 5 & Chapter 6
5	Consumer Behavior and Welfare Analysis	Utility theory and preference representation Indifference curves and budget constraints Consumer equilibrium and demand derivation Revealed preference theory Consumer surplus and welfare measurement Application: BISP cash transfers and energy subsidies	PR, Chapter 3 and Chapter 4
Module 3: Firms, Competition, and Market Power Duration: Week 6–10 Objective: Understand how producers operate, how markets vary in competition, and implications for regulation.
6	Production and Costs	Production function and technology Marginal product and returns to scale Short-run and long-run production Cost functions: fixed, variable, total, average, marginal Economies of scale and scope Policy relevance: Incentives in agriculture, textile sector and SMEs	PR , Chapter 7; GM, Chapter, 13	Assignment and Quiz
7	Perfect Competition and Market Efficiency	Characteristics of competitive markets Profit maximization for firms Short-run and long-run supply curves Efficiency in perfectly competitive markets Policy examples: Agricultural price floors and output controls	PR, Chapter 8
MID TERM EXAM
9	Monopoly and Regulation	Monopoly power and price setting Deadweight loss and welfare implications Natural monopolies and regulation challenges Price discrimination and market segmentation Pakistan utilities: electricity, gas, water sector	GM, Chapter 15 & Chapter 16 ; ALL, Chapter 12
10	Oligopoly and Strategic Interaction	Characteristics of oligopoly markets Introduction to game theory Nash equilibrium concepts Collusion and cartels Price wars and strategic behavior Sector case studies: Cement, telecom, sugar industries in Pakistan	GM, Chapter 17 ; PR, Chapter 12
Module 4: Labor, Public Goods, and Market Failures Duration: Week 11–14 Objective: Examine labor market dynamics, externalities, and government responses to market failures.
11	Labor Markets and Wage Determination	Labor demand and supply Wage determination models Human capital and productivity Informal labor markets and dualism Gender wage gaps and labor market discrimination Minimum wage policy and employment programs	GM, Chapter 18 and PR, Chapter 14	Assignment & quiz
12	Interventions: Taxes and Subsidies	Tax types and incidence Effects of taxes and subsidies on markets Efficiency vs equity trade-offs GST reforms and challenges in Pakistan Input subsidies and minimum wage impacts	GM, Chapter 12
13	Externalities and Environmental Policy	Negative and positive externalities Pigouvian taxes and subsidies Command-and-control regulations Coase theorem and property rights Environmental issues in Pakistan: Lahore smog, plastic bans	PR, Chapter 12; ALL, Chapter 9; JP, Chapter 18
14	Public Goods and Information Asymmetry	Characteristics of public goods Free rider problem Moral hazard and adverse selection Insurance markets and healthcare provision Education quality and private vs public school dynamics	GM, Chapter 11
15	Risk, Uncertainty, and Policy Design	Decision-making under uncertainty Expected utility theory Insurance markets: crop insurance, health insurance Moral hazard and asymmetric information revisited Disaster relief and risk financing in Pakistan	PR, Chapter 5, ALL, Chapter 15
16	Group Presentations and Course Synthesis	Student presentations applying microeconomic tools to real policy cases Review and integration of course topics Discussion on how microeconomics shapes public policy analysis and decisions

Prerequisites For this Course:

Text Book(s):

Reference Book(s):

Module 1: Foundations of Microeconomics for Public Policy

Module 2: Markets, Prices, and Policy Tools

Module 3: Firms, Competition, and Market Power

Module 4: Labor, Public Goods, and Market Failures

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