Title: Policy Analysis: Frameworks and Models
1Policy Analysis Frameworks and Models
- Stokey and Zeckhauser Ch1-3
- Jenkins-Smith Ch1-3
- Weimer and Vining Ch1-2
2Where we left off with Weimer Vining
- Executive Summary
- Introduction
- Statement of the Problem
- Current State
- Statement of the Policy Goals
- New Ways of Organizing
- Comparing the Alternatives with the Policy Goals
- Summary Table
- Evaluation and Recommendation
3Stokey and Zeckhauser Framework for Analysis
- What do you do when a complicated policy issue
lands on your desk? - Establish the context
- Lay out the alternatives
- Predicting the consequences of each alternative
including likelihood - Valuing the outcomes
- Making a choice
- These are craftsmans tools you must learn to
wield them with skill.
4Models
- Model a simplified representation of some aspect
of the real world - Types
- Diagrammatic flow charts, decision trees they
identify distinct stages in a process - Conceptual models taking complex ideas and
concepts and simplifying them - Long division large numbers are sometimes
confusing - Tragedy of the Commons (Garrett Harding)
describes the incentives associated with the
common grazing ground of a medieval English
village. Where individuals ignore the cost their
use has on others with the inevitable result of
overgrazing that is costly to all.
5More on Types
- Simple formal mathematical models that describe
explicitly the quantitative changes in a
particular variable in response to stimuli. - Example in a savings account/interest
- Descriptive describing the way the world
operates - Prescriptive provide rules for making an optimal
choice prescribing courses of action
(normative/optimizing models) - First, construct a descriptive model that
encompasses all choices open to the decision
maker and predicts the outcome of each - A set of procedures for choosing among
alternative actions given the decision makers
preferences among the outcomes.
6A couple more
- Deterministic the outcome is assumed to be
certain. Natural Laws Emc2 - Probabilistic Where the outcome of a particular
action is not unique, instead there is a range or
a number of possible outcomes.
7Judging a model
- How do we judge a model?
- We judge a model on how well it works or how
accurately it predicts. - Taking great care with our assumptions and model
specification (Are we including the right
explanatory variables?) - A useful model is streamlined and relatively
simple (How do we decide on which variables to
omit?)
8Why use a model?
- The discipline helps us get our thinking
straight it forces us to think about fundamental
principles - The possibility of experimenting with the model
rather than the system itself - Facilitates communication among those concerned
why did you make those assumptions? Why did you
leave out those important variables?
9The Model of Choice
- Allocating scarce resources with a focus on the
public sector
There are two primary elements of any act of
choice
- The alternatives available to the decision maker
- The decision makers preferences among the
alternatives
- Trade-offs are the essence of difficult decisions
- This model assumes little significant uncertainty
10Alternatives available to the decision maker
- Two definitions
- Efficiency a combination of attributes is said
to be efficient if, given the available
alternatives, it is impossible to increase one
output without giving up some of at least one
other. - Domination When comparing two alternatives (A
and B), A dominates B when A is better in every
respect. Dominated points can never be efficient.
p.24 of SZ
11More
- The possibility frontier the set of efficient
alternatives. The frontier may be straight or
curved, continuous or discrete, or a few isolated
points.
This curve tells us the maximum achievable output
of water for every possible output of
electricity. Point F indicates that with an
electrical output of 8 thousand kwh, the maximum
water output is 32 million gallons, and
conversely.
Electricity (thousands of kwh/day)
20
E
i
10
F
i
W
i
0
30
10
20
40
Water (millions of gallons/day)
12The decision makers preferences
- The 2nd element of the fundamental choice model
describes the decision makers preferences
Indifference Curves
Electricity (thousands of kwh/day)
i
Each of these points are found to be equally
satisfactory and all of those along the curve
they lie on the same indifference curve because
they are equally satisfactory.
S
20
i
R
10
P
i
I1
i
Q
0
30
10
20
40
Water (millions of gallons/day)
13A family of Indifference Curves
- Similarly, we could draw other indifference
curves depicting lower and higher levels of
satisfaction.
Remember, we dont assign specific values to
these levels of satisfaction, we say I1 is better
than I0. Also, there is no implication that
movements of equal distance across the graph are
equally valuable. Things get better as we move
north and east. Such a family of curves is
called an indifference map.
Electricity (thousands of kwh/day)
20
10
I3
I2
I1
I0
0
30
10
20
40
Water (millions of gallons/day)
14The Best Choice
- Here we combine the continuous possibility
frontier and the indifference map.
The best choice for the planner is the
combination of electricity and water represented
by point __. This is because only at that point
can the planner reach the highest possible
indifference curve.
Electricity (thousands of kwh/day)
20
E
i
G
i
T
i
10
F
i
W
i
0
30
10
20
40
Water (millions of gallons/day)
15MRT
At any point on the curve, the rate at which one
output can be transformed into another is given
by the slope at that point on the possibility
frontier. We refer to the rate at which one
output can be transformed into the other at a
particular point as the marginal rate of
transformation (MRT).
Electricity (thousands of kwh/day)
20
E
i
G
i
10
F
i
W
i
0
30
10
20
40
Water (millions of gallons/day)
16MRS
The slope of an indifference curve may be
interpreted in a similar way. It represents the
way in which the decision maker is willing to
trade electricity for water while still remaining
on the same indifference curve. The steepness of
the indifference curve indicates the rate at
which the planner is willing to trade off between
the two outputs. This trade off rate is called
the marginal rate of substitution (MRS).
Electricity (thousands of kwh/day)
i
M
20
10
N
i
I1
0
30
10
20
40
Water (millions of gallons/day)