2 - Empirical tools of Public Econ Flashcards
empirical public finance
statistical methods to measure the impact of gov policies on individuals and markets
correlation
2 variables co move
difference between causation and correlation
- either A causes B
- B causes A
- 3rd aspect that causes A and B
causation
the movement of 1 variable causes the movement of another variable
what is an experiment used to test causality
randomised trial
what is a randomised trial
individuals randomly divided into treatment group and control group
- estimating the effects of something on something else
how is bias fixed
- large sample = eliminate differences between groups ‘law of large numbers’
problems with randomised trials
- external validity
- attrition
what is external validity
results are valid for the sample - but the sample is different from the population - doesnt apply to population
what is attrition
individuals leave the experiment before the end
- reduced size of sample
- biased estimates - not true to population
what are the 3 types of observational data
- observational data
- time series analysis = analysis over time
- cross sectional regression analysis = analysis of many individuals at one point in time
what are the problems with time series analysis
- cant tell if correlation is causation
- other factors may cause bias and effect causal interpretation = another variable that is also correlated with the DV
what is the regression line
measures best linear approximation to the relationship between any 2 variables
- if B is statistically significant = there is a relationship
problems with cross sectional regression analysis
- is the correlation causal?
- another variable that is effecting X = in the e = so bias - fix by adding more control variables
what are Quasi experiments
what does it test
natural experiments without randomisation
- treatment group
- control group
- outcome Y
tests the difference in average outcome between treatment and control after the change - but because T and C maybe different before the change you have to also compute difference before
what is the difference in difference estimator for quasi experiments
- what does it measure
- what is parallel trend assumption
DD = [Yta - Yca] - [Ytb - Ycb]
- does the difference between treatment and control change after the policy
- requires parallel trend assumption = without the change difference between T and C would have stayed the same
what does DD require (GRAPH)
parallel trend assumption
problems with quasi experiments
- cant be certain to get rid of bias from the treatment-control comparison
- parallel trend assumption
ways to validify quasi experiments
- need to be certain that the change after the policy happened because of the policy = way to validify
- test on another control group as placebo
- plot on a time series and see what happens
what are the best ways to test for causal relationship between policy and outcome
- best = randomised trial - removes bias by randomly assigning T and C
- time series analysis
- cross-sectional regression analysis
- quasi experimental analysis
what is elasticity of demand
the percentage change in demand caused by a 1% change in the price of that good
what is perfectly inelastic and elastic
- elastic = quantity demanded is extremely sensitive to price changes –> e = - infinity –> horizontal
- inelastic = quantity demanded does not change at all in respect to price changes –> e = 0 –> vertical
Consumer surplus
the price they pay is less than the price theyre willing to pay
producer surplus
difference between the amount willing to supply goods for and the actual amount received
what is the first welfare theorem
markets yield pareto efficient outcome if:
- no externalities
- perfect competition
- perfect information
- rational agents
what is the second welfare theorem
SW can be optimised at an equilibrium given a suitable redistribution of the endowments
what are different kinds of SWF functions
- utilitarian
- utilities given equal weight
- redistributive - if MU decreases the richer you get - rawlsian
- SW determined by minimum utility in society
- very redistributive - libertarian
- individuals should receive compensation congruent with their contributions - commodity egalitarianism
- basic needs are met for society - equality of opportunity
- all individuals have equal opportunities for success - should be compensated for inequalities that they arent responsible for
