problem set 4 EOiM PDF

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1 a) Scientific knowledge is a logical and mathematical knowledge. It is in the disposal of an authority made up of suitability chosen experts. Scientific knowledge is organized and centralized and is available to everybody. The other knowledge, the knowledge of the particular circumstances of time and place is unorganized and decentralized. It is particular of each individual, and it is advantageous because this knowledge is the knowledge of a particular reality that only you (and some others that are in the same context) knows, is unique information that can be used beneficially, but if the decisions depend on this information.

b) The scientific knowledge is useful at the time to take long-term decisions where there are neither quotidian adjustments nor economic problems arising. In long-term we can apply the scientific models, but not in the short-run. The knowledge of particular circumstances is more useful in short-term (daily) decisions, where economic order is subject to quotidian small changes or day-to-day adjustments that affect and condition our decisions.

c) The central planning systems uses the scientific knowledge and they don’t need the specific knowledge or knowledge of the particular circumstances of time and place because they plan based on stats and logical or mathematics resolutions that takes minor differences from the situations. On the other hand, markets systems, which uses price systems, include the individual preferences that, in some way, it reflects the specific knowledge of particular circumstances to the individual taking a specific decision in the market. It seems that market systems allows a faster adaptation to changes because it incorporates the knowledge of the particular circumstances of time and place.

2 a) The problem that gives externalities is that these are not commercialized in a market, and is to much difficult to commercialize it and fix a price. So there are no way to pay to producing externalities. For example, there is no market that makes you to pay to enter (use the access) to Barcelona by car at the time of maximum traffic, which action makes an externality: to enter produce slow down traffic and every driver can access it without paying the access. To solve the problem without creating a market and achieve Pareto-efficiency is to regulate externalities throw institutions using incentives/disincentives.

b) If there exists property rights fully defined and the negotiation between all people is allowed, in this case to trade the rights of producing externalities can be possible, and this trade could be efficient. Despite that, we have to suppose that there aren’t transactions costs (to draw the contract, to conduct negotiations …) because if these exists, many operations could be so costly that could not be done, while in a system without cost would be done.

3 At first, however is not rational going to vote for each individual, for the society could be beneficial because with the vote of each person we can have an accurate idea of society preferences. It is useful to convert the sum of knowledge of the particular circumstances of time and place that have each person to a scientific knowledge that can be useful to analyse. Other argument is that we need to vote to constitute the institutions (government institutions in that case) which are needed due to the maladaptation. We need them to standardize the human behaviour, organize the society and cooperate.

4 a) The government strategies have been different in Spain and United States. US created the programme “Operation Warp Speed” that gave finance and support to facilitate research and increase the production in medical private companies. With this the industries incentives did not change. So, US used the law to increase production of medical products, while Spain, used the law to centralize and control the private industries (medical services and medical production). This centralization gave a change in incentives, reducing these, producing a reduction to production and investigation.

b) In the Spain case where government centralized the operations, the companies haven’t freedom to choose and sell their produced goods or sell the knowledge produced due to the investigation because they had to sell it to the government. It causes low prices and the economy does not operate at optimal because companies doesn’t achieve the maximum production to cover the high demand for medical goods. In the US, where an increase of production and an increase of knowledge that

gives some vaccines, the prices may doesn’t increase so much because the production increases too, supporting the increase of demand, so the economy was operating more optimally....