TB: Modern Principles of Economics (Cowen & Tabarrok)

Incentives matter; good institutions align self-interest with social interest; trade-offs are everywhere; think at the margin; trade makes people better off; wealth and economic growth matter; institutions matter; economic cycles can be moderated but not avoided; inflation is caused by increased money supply; central banking is hard.

• "A price is a signal wrapped up in an incentive" — prices communicate the value of scarce resources to consumers, suppliers, and entrepreneurs, and simultaneously incentivize everyone to respond to scarcity and changing circumstances.
• When a Middle East crisis reduces oil supply, the price system reallocates oil from lower-valued to highest-valued uses automatically. Price ceilings allocate by random and trivial factors (first come, first served) instead.
• Without trade, specialization is impossible. The size of the market determines the scope of specialization possible.

• When externalities are significant, markets work less well and government action can increase social surplus.
• The Coase theorem: if transaction costs are low and property rights are clearly defined, private bargaining will ensure efficient outcomes even with externalities. Tradeable pollution allowances are a successful application.
• Markets alone will not solve all externality problems.

• The prisoner's dilemma is the negative counterpart to the invisible hand: in one case self-interest leads to the optimal outcome; in the other, to outcomes no one wants.
• The problem with monopoly is deadweight loss — similar to prisoner's dilemma payoffs — but monopoly that increases innovation may increase long-run growth.
• A cartel is a group of suppliers trying to act as if they were a monopolist.

• Long-run growth cannot come from capital accumulation alone — diminishing returns means both physical and human capital eventually stop driving growth.
• Corporate taxes don't fall only on corporations: who ultimately pays depends on relative elasticities of demand and supply.
• The great debate over fiscal policy is the balance between crowding out and the multiplier effect.