Fire that Central Planner

Sellers should only worry about their own costs
Buyers: don't need to know reason behind price, just whether they value that good enough for that price

ex: suppose agreed fed gov't should have strong role in health care, 1 size fits all, same for all states
What if...wrong?
In market, have incentive to solve problems
In gov't, no plan B even though different states have diff. needs
Trial & error successful in markets but not in gov't--> should mimic experimentation

What's useful about market equilibrium?
Lines cross, all happy, can't do better
Those who value the most will get the product

Resources used are the cheapest to employ; Chicago school of econ says you'll walk past a $100? b/c markets efficient enough...silly

4 Problems For the Central Planner

(Imagine 5 Demanders, 5 Suppliers, Happy Point at 3 Guitars Produced)

1) Who Should Make Guitars? Don't Know Firm Costs

Should one producer make X amount or all? Maybe S4 make all guitars? (But oppor costs $25)

-Price to pay workers, rent, electricity

-Profit missed from doing something else

Only costs S2 $15 to produce, world would be poorer if allocated wrong

2) Suppose got the sellers right, S1 S2 S3 have lowest oppor. costs

Who decides who gets the guitars?

Prices force people to reveal themselves to show what they value the most

Imagine if the wrong people were forced to consume those guitars 

D4 gets $15 of pleasure from it, but D2 gets $25 of pleasure, world would be $10 richer

3) How know that 3 guitars is the right amount to produce in market?

Cent. Planner says to produce 1 or 2

Problem: too few guitars, still more deals to be made!

Markets are NOT about producing as much as possible

->Produce 5, demand low don't value the guitar, too much created

4)? Social Responsibility of business

Price = cost/values, what does society deem as important

How firms handle burden?

ex: MA premium incr. for policies; MA healthcare plan passed BUT did not measure the increased cost on suppliers

Consider: MA in better health, better education, & more people uninsured compared to the nation

-->entire country cannot match MA people, should have diff. plan

Problem: need for more doctors so costs went up

ex: 60 aired segment on huge amnt of Medicare fraud, health issues matched with list of ppl

1) health & human services

-big challenge pays out billions of claims a year

BUT medicare becomes bigger! 

2) Why took gov't so long to notice?

It was "well-intentioned", didn't think would attract fraud

Problem with Central Planner:

No incentive to produce; Markets provide financial incentives 

Accountability for aid

-->Some aid makes poor worse off or doesn't help at all

Knowledge problem-->Need feedback!

Lesson: Survive, must decentralize decision making

States should be humble in light of knowledge problem

ex: let states be unique in health care

"one size" does not necessarily fit all

-learn from mistakes & keep trying

-Need to be rightly oriented to issue

Rent Control: Price Ceilings

-Legislate rent control, can't raise price above some ceiling

-->landlords can't raise and sellers can't bid for a higher price; Should it apply to all?

Why is the moral responsibility of the landlords? Not only provide bed, but MUST provide cheaply