MIT Department of Urban Studies and Planning

Judy Geyer

Building 9, Office Number

11.203 Microeconomics and

11.202 Planning Economics

MIT Department of Urban Studies and Planning

COURSE DESCRIPTION AND OBJECTIVES.

The primary purpose of the microeconomics and planning economics course set is to enable you to use microeconomic thinking, concepts and tools in your urban planning work. 11.203 begins with the basics of supply and demand, and uses this as the context for considering consumer and organizational decisions within competitive markets. The course builds to applying economic analysis to a variety of public issues such as the effects of taxation, price supports, and international trade. In 11.202, we will first briefly review real estate valuation and finance and study the determinants of urban growth, and locational patterns within cities. We will focus on what policy makers and planners can do to shape location decisions, foster urban growth, and improve the efficiency of market outcomes.

The semester is divided into two modules. Microeconomics (11.203) runs through November 9th. Students can waive out of 11.203 by passing an exam that is given during orientation week. I encourage students who have taken an introductory microeconomics class in the past to try to waive 11.203. Students who passes the exam to waive 11.203 are still welcome to attend any lectures.

Planning economics (11.202) runs from November 14th through December 15th. All students must take 11.202.

REQUIRED READINGS

1. P. Krugman and R. Wells, Microeconomics, 3rd edition. (2012; purple-ish cover; about $44 new; many used and rental options). I’ll cite this book as “KW”.

1. A. Sana, T. Weston, and N. Cepeda (2013), Laptop multitasking hinders classroom learning for both users and nearby peers. Computers & Education 62, pp 24-31 (available on course website)

1. Newspaper articles and podcasts, as made available on the course website

COURSE REQUIREMENTS

Readings (pre-class): Readings should be done prior to the class for which they are listed. Additional optional readings are posted on the website.

News Analysis and Discussion (pre-class): These materials are posted on the website or available on-line. In assigned weeks, you should read the news article(s) or listen to podcast and apply economic reasoning to the issues described. Then, answer the associated questions before coming to class. You do not need to hand in, but we will discuss in class. Your participation in the class discussion will affect your grade at the margin.

Participation:

I expect you to attend and participate in all classes. The classes will be as interactive as possible.

Assignments:

Ten written assignments will be posted on the course website. These apply concepts from the course to specific problems, and they form much of the basis for the weekly recitations. Please write legibly or type your answers. Completed assignments should be handed in at the start of class- physical copies only, no electronic copies, please. You are free to form study groups but you need to hand in an individual assignment that is not identical to that handed in by another student. Late assignments will not receive any credit. These assignments are intended to provide timely feedback on your progress and to teach concepts. They are graded check plus/check/check minus to promote learning.

Exams:

Two in-class midterms (for students taking 11.203)- closed book.

One take-home final (for all students)- time limit, open book.

I expect you to work on the take-home final by yourself without consulting any one else.

There are no make-ups. Please check dates and let me know immediately if you have a conflict.

GRADING

For students taking the full semester, grades will be based on the problem sets (10%), two midterms (25% each) and take-home final (30%) and participation (10%).

For students taking Planning Economics only, grades will be based on problem sets (15%), take-home final (75%) and participation (10%).

RECITATION

Recitations are held on Thursdays and Fridays following the lectures. Recitations will not cover new material. They review material from the previous classes primarily by going over problems. Assignments will be reviewed in recitation and notduring class. While attendance is not mandatory, you will need to master the content of these recitations to successfully complete the course. The average student will need to attend, and I strongly encourage you to do so at least until the first midterm.

ACADEMIC INTEGRITY

For this particular course, there are some specific behaviors required to meet our standards of academic integrity:

Assignments: While I strongly encourage all students to work in groups, the final write up of assignments must be done individually with no sharing of written answers.

Exams: All exams must be the sole work of the individual student.

Violations of these standards will automatically result in all participating students failing the course and being remanded to the discipline committee for further action.

COURSE SCHEDULE

Class 1: Introduction to microeconomics and why it matters for urban planning

An introduction to microeconomics and its core principles; main methods and tools of economics (models, variables, graphs, equations). The production possibility frontier as an illustration of scarcity, choice and opportunity cost; comparative advantage and gains from trade.

Reading: KW Introduction, Ch 1, 2 (including appendix).

Exercises:KW - Ch 2 problems 2, 4, 5, 6.

Optional: KW Ch 8 (up to p218)

Discussion:Binyamin Appelbaum, Perils of Globalization When Factories Close and Towns StruggleNew York Times

Class 2: Demand and supply basics: price determination

Fundamental model of competitive markets, demand and supply curves; market determination of price and market equilibrium.

Reading: KW Ch 3.

Exercises: KW - Ch 3 problems 1, 2, 4.

Discussion:Jeffrey Sparshott, U.S. Job Growth Picks Up, but Wage Gains Lag Behind, Wall Street Journal

Class 3: Consumer and producer surplus and gains from trade

Ticket scalping and gains from trade; consumer and producer surplus.

Assignment:Assignment 1 due.

Reading: KW Ch 4. Van Zandt, chapter 2 (through page 46).

Exercises: KW - Ch 4 problems 7, 10, 11.

Discussion:[Efficiency] The Pickle Problem, Planet Money Podcast.

[Equity] Nagourney and Dougherty, The cost of a hot economy in California, NYTimes

Class 4: Elasticity

The shape of demand and supply curves; the importance of elasticity and its measurement.

Reading: KW Ch 6.

Todd Littman, Transit Price Elasticities and Cross-Price Elasticities.

Optional:T. Van Zandt, Firms, Prices and Markets, 2006 chapter 3 (pages 60-68).

Exercises: KW - Ch 6 problems 12, 13, 15, 16.

Discussion: Why Did the MBTA Raise Fares? Boston Magazine.

Class 5: Policy interventions that affect price and efficiency: taxes

What happens when policy interventions interfere with the market price? Tax incidence, deadweight loss and efficiency.

Assignment:Assignment 2 due.

Reading:KW Ch 7.

Exercises:KW - Ch 7 problems 6, 7.

Discussion: Airbnb and hotel tax.

Class 6: Policy interventions that affect price and efficiency: price controls

What happens when policy interventions interfere with the market price? Tax incidence, deadweight loss and efficiency.

Reading:KW Ch 5.

Exercises:KW - Ch 5, problems 3 and 5.

Discussion: Jason Furman and Betsy Stevenson, “The Economic Case for Raising the Minimum Wage,” Whitehouse.gov.

Jesse Rothstein and Diane Schanzenbach “What Does the Seattle Experiment Teach us about Minimum Wages?” Econofact.org

Class 7: Production: framing decisions, costs, profits, competitive markets and supply

Decisions made by organizations that result in the supply of goods and services; implicit costs, opportunity costs and economic profit; production functions, cost functions and concepts; short-run versus long run; profit maximization and output decisions of competitive firms.

Assignment:Assignment #3 due

Reading: KW Ch 9 (up to page 258), Ch 11;

Exercises: KW - Ch 9 problem 9; Ch 11 problems 2-5.

Discussion: James Surowiecki, That Sunk Cost Feeling, The New Yorker

Optional: Van Zandt, Ch 4.

Class 8: Production decisions and the supply curve

Assignment:Assignment #4 due (this is a mini assignment)

Reading:KW Ch 12;

Exercises: KW Ch 12 problems 1,8, 10.

Discussion: Tar Sands.

Optional: Van Zandt, Ch 5.

Class 9: First Midterm

Class 10: Consumer choice, decision-making, and the demand curve

Rational decision-making for price-taking consumers; budget constraints, utility and indifference curves; income and substitution effects.

Reading: KW Ch 10 and Ch 10 Appendix and Ch 19 Appendix.

Exercises: KW Ch 10 Appendix problems 6, 12, and 14.

Class 11: Consumer choice and behavioral economics

Savings decisions and introduction to behavioral economics.

Reading: KW Ch 9 (p258 onwards).

Sunstein and Thaler, “Save More Tomorrow,” Nudge.

Choi, Laibson, and Madrian, “$100 Bills on the Sidewalk: Suboptimal Savings in 401k Plans.”

Class 12: Labor markets

Labor market demand and supply; marginal productivity; human capital theory; compensating differentials; discrimination.

Assignment: Assignment #5 due

Reading:KW Ch 19 and 19 Appendix.

NBER Digest, “Employers’ Response to Racial Names.”

Exercises: KW Ch 19 problems 6, 14, and 15.

Discussion: Help Wanted, Planet Money Podcast.

Class 13: Imperfect competition: Monopoly

Long run costs and returns to scale. Overview of market structures; monopoly; price discrimination.

Assignment:Assignment #6 due

Reading:KW Ch 13;

Exercises: KW - Ch 13 problem 10.

Discussion: Designer sunglasses

Optional: Van Zandt, Ch 7.

Class 14: Imperfect competition: Oligopoly and Anti-Trust

Markets with multiple but limited firms; anti-trust; decision-making with interdependency.

Reading:KW Ch 14.

Exercises: KW Ch 14 problems 4, 5, and 6.

Discussion: The Fondue Conspiracy, Planet Money Podcast.

Class 15: Game theory and strategic planning

Strategic interdependence; game theory.

Reading:Van Zandt Ch 13.

Kaveh Madani, “Game Theory and Water Resources.”

Class 16: Asymmetric information and incentives

Asymmetric information; moral hazard and adverse selection in insurance markets and the workplace; principal-agent problems and incentives.

Assignment:Assignment #7 due

Reading:Pindyck and Rubinfeld Ch 17.

Podcast:Why Textbook Prices Keep Climbing, Planet Money.

Exercises:KW - Ch 20 problems 12, 14.

Discussion: Hal Varian, A Bangladesh Bank Relies on Peer Pressure for Collateral, NY Times

Class 17:Auctions

Class 18: Second midterm

Class 19: Externalities

Positive and negative externalities; remedies involving market incentives and property rights.

Reading: KW - Ch 16.

Exercises: KW – Ch 16 - problems 2, 6, and 8.

Discussion: Guns and Bullets: Can We Tax Our Way to Safety? Taxrates.com

Class 20: Externalities (cont); Tradable permits and economics of suburban sprawl

Permit auctions to address pollution; the causes of suburban sprawl and appropriate remedies.

Reading: Jan Brueckner, “Urban Sprawl: Diagnosis and Remedies”

Gordon, Peter and Harry W. Richardson, “Prove it: The Costs and Benefits of Sprawl.” The Brookings Review (1998): 23–25.

Discussion: Tradable permits exercise (posted) - prepare auction strategy before class.

Class 21: Public goods and common resources

Public goods and common resources; the problems they pose for market allocation and policy responses.

Assignment:Assignment #8 due

Reading:KW Ch 17.

Exercises:KW - Ch 17 problem 4.

Discussion: Congestion in Singapore

Class 22: Real Estate Valuation

Reading:Peter Linneman, “Property-Level Pro Forma Analysis.”

John Herbohn and Steve Harrison, “Introduction to Discounted Cash Flow Analysis and Financial Functions in Excel.”

Class 23: Land Rent and Location Theory

Assignment:Assignment #9 due

Reading:Arthur O’Sullivan, Urban Economics 8/e, chapter 6

Edward Glaeser, “The Economic Approach to Cities,” NBER, pages 1-10.

Glaeser, Kahn, and Rappaport, “Why Do the Poor Live in Cities? The Role of Public Transportation,” Journal of Urban Economics.

Cohen and Coughlin, “An Introduction to Two-Tiered Taxation of Land and Buildings.” Federal Reserve Bank of St. Louis 87 (2005).

Class 24: Agglomeration and Urban Growth

Reading:Quigley, John M., “Urban Diversity and Economic Growth.” Journal of Economic Perspectives 12(1998): 127–138.

Gerald Carlino, “Three Keys to the City: Resources, Agglomeration, and Sorting.” Business Review 2011.

Gerald Carlino, “Beautiful City.” Business Review 2009.

Discussion:James Surowiecki, Why Do Companies Like Company? The New Yorker

Class 25: Urban economic growth and state and local policy

Assignment:Assignment #10 due

Reading:Ellen and Schwartz, “No Easy Answers” Brookings Review

Moretti, Enrico. The New Geography of Jobs. New York, NY: Houghton Mifflin Harcourt, 2012. (Chapter 6. Poverty traps and sexy cities).

Discussion:Why Did the Job Cross the Road? Planet Money Podcast.

Class 26: Future of cities in the economy

Assignment:Take-home final due

Reading:Glaeser, Edward L., “Demand for Density? The Functions of the City in the 21st Century.” The Brookings Review (2000): 12–15.

Henderson, Vernon, “Urbanization in Developing Countries.” The World Bank Research Observer 17(2002): 89–112.

Greenstone, Michael and Adam Looney, An Economic Strategy to Renew American Communities. The Hamilton Project, Brookings Institution, Oct 2010.

“Gaponomics.” The Economist, Mar 2010.

GRADING CRITERIA

Grades will be assigned according to the following criteria:

A Excellent: Exceptional work for a graduate student. Work at this level is unusually thorough, well reasoned, creative, methodologically sophisticated, and well written. Work is of exceptional, professional quality.

A- Very Good: Very strong work for a graduate student. Work at this level shows signs of creativity, is thorough and well-reasoned, indicates strong understanding of appropriate methodological or analytical approaches, and meets professional standards.

B+ Good: Sound work for a graduate student; well-reasoned and thorough, methodologically sound. This is the graduate student grade that indicates the student has fully accomplished the basic objectives of the course.

B Adequate: Competent work for a graduate student even though some weaknesses are evident. Demonstrates competency in the key course objectives but shows some indication that understanding of some important issues is less than complete. Methodological or analytical approaches used are adequate but student has not been thorough or has shown other weaknesses or limitations.

B- Borderline: Weak work for a graduate student; meets the minimal expectations for a graduate student in the course. Understanding of salient issues is somewhat incomplete. Methodological or analytical work performed in the course is minimally adequate. Overall performance, if consistent in graduate courses, would not suffice to sustain graduate status in “good standing.”

C Deficient: Inadequate work for a graduate student; does not meet the minimal expectations for a graduate student in the course. Work is inadequately developed or flawed by numerous errors and misunderstanding of important issues. Methodological or analytical work performed is weak and fails to demonstrate knowledge or technical competence expected of graduate students.

F Fail: Work fails to meet even minimal expectations for course credit for a graduate student. Performance has been consistently weak in methodology and understanding, with serious limits in many areas. Weaknesses or limits are pervasive.