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Markets and Market Failure with Cases: Syllabus

HKS API-105A

(cross-listed as GSD SES-05222)

Fall 2015

Note: This syllabus is subject to change (see the version date in the header). Updated versions of this

syllabus will be posted occasionally, but once the semester starts, the Canvas course site will always have

the most up-to-date assignments. “TBA” means “To Be Announced.”

Class schedule:

Class Meetings: Mondays and Wednesdays, 8:45-10 am, Littauer 280

Review Sessions: Fridays, 8:45-10 am, Littauer 130 (optional)

There will be two optional “shopping” sessions on Monday, August 31, at 8:45 am and 9:30 am, Littauer

280. We advise attending one of the shopping sessions as course requirements will not be discussed in

subsequent classes. The first regular class will meet on Wednesday, September 2 at 8:45 am, in L-280.

There are reading assignments and study questions for that first class. For the first week only, we

will also meet on Friday, September 4, during what normally would be the time for the optional review

sessions.

Faculty and Staff Faculty: Albert L (“Nick”) Nichols

Adjunct Lecturer in Public Policy

Littauer 116

617-495-8270 (I am not on campus every day and do not have voicemail

activated, so if there is no answer, please email me, including a phone

number and good times to reach you.)

albert_nichols@hks.harvard.edu

Office hours:

Wednesday, 1:30-3:30 pm: Reserve a slot using Canvas. You also may drop

by and take your chances; I will be happy to meet with you if no one has

reserved the time.

Other times: email me for an appointment or catch me before or after class to

set a time. On days that I will be on campus (generally Monday and

Wednesday) and do not have other commitments, I am happy to schedule

meetings outside regular office hours as needed.

Faculty assistant: Lisa MacPhee Littauer 207

617-495-5994 Lisa_macphee@hks.harvard.edu

Teaching fellow: Galit Eizman

galiteiz7@gmail.com

Office hours: Fridays, 10am-12pm, location TBA

Course assistant: James Curtin

jamescurtin@college.harvard.edu

Office hours: TBA

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Overview

API-105A (cross listed at GSD as SES-05222) provides an introduction to how markets operate,

criteria for assessing their performance, and the circumstances under which they perform well or poorly.

The first half of the course covers market behavior including supply, demand, and market prices; the

strategies of consumers and firms; and the effects of taxes, subsidies, price controls and other kinds of

government interventions on market outcomes. The second half covers the assessment of market

performance, the problems caused by market failures—including monopoly, externalities, public goods,

and asymmetric information—and the types of policy solutions that can be used to help correct such

market failures. Class sessions roughly alternate between lectures and case discussions.

Many students who take the course have had some exposure to microeconomics (e.g., an

undergraduate course or the Summer MC/MPA program), but as prior experience has shown, students

with no prior coursework can do very well in the course. The mathematics used in the course are limited

to algebra and graphing.

The course differs from most microeconomics courses in its extensive use of cases to provide

students with experience in identifying and applying economic concepts and tools to real-world problems.

In a typical week, a new topic is introduced on Wednesday with an assignment in the text and a

lecture/discussion to address the concepts and tools related to the topic. On Friday, there is an optional

review session with the teaching fellow (TF) and a problem set due at the end of the day. For Monday,

students are assigned a case with study questions and come to class prepared to discuss their analyses of

the case.

The course satisfies the quantitative course distribution requirements for the HKS MC/MPA and

MPA2 degrees. MPP students may use this course to fulfill their API-101 requirement, but only with the

permission of the course head of API-101 (Professor Janina Matuszeski) and Professor Nichols. MPP

students should wait until they have attended orientation before contacting Professors Matuszeski or

Nichols. Students cannot take both API-105 and API-101 for credit. The course also may be used to

satisfy requirements in several programs at the Graduate School of Design (GSD), including the Masters

in Urban Planning

API-105B/SES-05203, which will be offered in the spring semester at GSD, covers the same core

topics and uses mostly the same cases and problem sets, but places greater emphasis on topics and cases

related to urban and regional planning. The spring semester course will be taught by Dr. Christopher

Herbert, Managing Director of the Harvard Joint Center for Housing Studies.

Additional Information/Requirements

A. Classes

Classes will start promptly at 8:45 am. Despite the early hour, please do not be late as it is

disruptive of others’ learning. Please bring your name tag to every class. HKS students should have a

name tag already. Other students should make or buy their own at Staples or elsewhere.

Class sessions generally will alternate “lecture” classes (mixed with other activities) and case

discussions. For lecture classes, please read the reading assignments before class so that we can move

through the material reasonably quickly and have time for questions and discussion. For some classes,

there will be short questions or problems assigned for discussion during class; you should read those

questions and do any calculations needed to discuss them in class. For case classes, read and prepare the

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case so that you are ready to address the issues raised in the case assignment and to participate in the

discussion. The first case assignment includes a short article with some tips for preparing cases. Please

read it carefully as it offers very useful guidance. We encourage students to work together in preparing for

class, particularly for case discussions. You may wish to form a regular study group for cases. Let the

teaching staff know if you would like to be in a group but are having trouble forming one.

As discussed below, class participation will be part of the basis for final grades. The most basic

form of participation is your on-time presence in the classroom. Students will find the most opportunities

to participate during case discussions, but there will be opportunities in other classes as well. In addition

to answering questions or making comments, asking questions can be a very valuable form of class

participation. The teaching staff will keep notes on class participation, with an emphasis on the quality

and insightfulness of comments or questions, rather than simple quantity. Contributions to case

discussions will receive more weight than contributions to other classes.

No mobile phones, tablets, or laptops may be used in class without prior approval and then

only for tasks immediately related to what is going on in class (e.g., the use of a tablet or laptop to take

notes or to review tables or figures in a case).

Prior to each lecture/discussion class, notes will be posted on Canvas and printed copies will be

available at the start of class so that you can take your own notes on them. We may not cover all of the

items in the notes, but students are responsible for the content. PowerPoint Slides used in class will be

posted after class. We will not post notes for the case discussions.

B. Review sessions and office hours

The Friday review sessions conducted by Galit Eizman, the TF, are optional, but many students

find them very valuable. Generally the sessions will focus on issues relevant to the problem set due that

day, working through some prepared examples and answering questions. However, the sessions may

address more general topics and students are free to ask questions on any course topics. Galit will hold

office hours immediately following the review sessions, from 10am-12pm.

Additional review sessions will be scheduled before each of the two exams, including one with

Professor Nichols.

All members of the teaching staff will post regular office hours for individual (or small-group)

help. You can sign up via Canvas for a 20-minute slot with Prof. Nichols. If you want to meet outside

posted hours, please arrange (via email or in person just before or after class) a mutually convenient time

to meet. If you are having trouble with the material, please take prompt advantage of office hours or

arrange another meeting time. There are weekly problem sets and each part of the course builds on earlier

parts, so it is important to stay current.

C. Reading

The text is Robert Pindyck and Daniel Rubinfeld, Microeconomics, 8th edition (Pearson, 2012,

ISBN-13: 978-0-13-285712-3) which is for sale or rent at the Coop under HKS API-105A. You also can

find it at online retailers, such as Amazon (which sells a Kindle as well as print versions). It is on reserve

at the HKS and GSD libraries, although most students will find it useful to have their own copies.

The 8th edition is now in its fourth year, so you should be able to find used copies easily if you

wish. In addition, the 7th edition is very similar to the 8th and you may wish to use it if you can get it at a

great price.

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Cases and other materials in the syllabus will be available online through the Canvas site for API-

105A. Occasionally additional materials not listed in the syllabus will be posted on the site.

D. Canvas Course Site

All materials (readings, notes, problem sets, etc.) other than the textbook will be available on the

course’s Canvas site, which is listed under both HKS API-105A and GSD SES-05222. For the first

couple of weeks it will be accessible to any Harvard student. After a couple of weeks we are likely to

limit access to students registered for the course.

You should check the site regularly to see if there are new materials for an upcoming class,

including short problems to prepare before coming to class and discussion questions for cases. The

syllabus will be updated periodically and posted, but the Canvas site will always have the most up-to-date

schedule and assignments.

Note: By default, Canvas will send you an email every time anything changes on any of the

course sites on which you are registered. To avoid being inundated with such emails, you probably will

want to choose less frequent delivery (e.g., weekly). We will use the “Announcement” section to

highlight changes in schedule or important new documents, and we will send emails to alert you if time is

very short.

If you have trouble with Canvas, while you are waiting to resolve them you can access most non-

text readings using the links in this syllabus.

Canvas includes an online discussion section. If you come across articles that you find interesting

as examples (or counterexamples) of concepts in in the course, we encourage you to post them in the

“Discussion” section of the Canvas site, along with whatever comments or questions you want to offer.

For copyrighted items, you should post a link to the material rather than uploading a copy. You also may

use the section to raise course-related questions or comments for input from other members of the class or

the teaching staff.

E. Problem sets

There will be a problem set due almost every Friday. The problem sets will be posted on the

Canvas site. The problem sets are complementary to problems discussed in class and the cases in

providing the practice required to learn microeconomics. We encourage you to work with classmates

on the problem sets, but you should write up your own answers (based on your understanding) for

submission. Copying another’s answer is unacceptable and is considered a breach of academic

integrity. On your cover sheet, put the names of students with whom you worked and any other

individuals who gave you help with the problem set.

You may submit your answers either by paper or electronically.

1. Electronic submissions

You may submit problem sets electronically via the Canvas site no later than 6pm, preferably as a

single file. That file should have a name of the following form:

[Last name].[first name].PSx.API105A.ext,

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where “x” is the problem set number and “ext” is the file’s extension. You can create your submission in

one of at least three ways:

1. Download the DOCX file for the problem set, enter your answers, and then submit your file with

those answers. If you create figures, you can paste them into your file.

2. Create a new file with just your answers.

3. Prepare a clear and legible hand-written set of answers, scan it, and then submit the scanned file.

Note: if you take this path, be sure that the resulting file is easy to read. For example, mobile

phone pictures are not acceptable if blurry

Make sure your file is readable by Microsoft Office applications or is a PDF or JPG (for scans) file.

2. Paper submissions

Paper copies will be due in a labeled locked box located below the student mailboxes outside

L-280 (the classroom) no later than 5pm. The papers will be picked up shortly after 5pm. If you are late,

you should put the date and time of your submittal on the paper. Late papers with the date and time will

receive reduced credit but late papers that do not have the date and time written on them will receive no

credit and may result in additional penalties.

3. Scoring

James Curtin, the CA, will review submissions and score them in a way that emphasizes turning

them in promptly and level of effort: 5 points for complete submissions (even if some of the answers are

incorrect), 1-4 points for incomplete or late submissions, and 6-7 points for outstanding efforts that get a

high percentage of correct answers and/or include answers to optional questions. You may skip one

problem set during the semester without any penalty. (If you hand in all of them, we will drop your lowest

score.) We will post suggested answers on the Canvas site a couple of days after the due date.

F. Exams

There will be a 75-minute in-class midterm (scheduled for Monday, October 19, regular class

time) and a three-hour final (December 14, 3-6pm). The final will emphasize topics covered after the

midterm, but it will cover the full course. About a week prior to each exam, copies of old exams will be

posted, with suggested answers posted closer to the exam date. Prof. Nichols and Galit Eizman each will

also hold a review session before each exam.

Both exams will be closed book with the exception that you may bring a one-sided, letter/A4-

sized page of notes. You may not give or receive help from anyone while taking the exam (other than

questions of clarification asked of Professor Nichols or the TF), nor may you use any materials

(paper or electronic) that are not authorized during the exam. Failure to follow these requirements

will be considered a breach of academic integrity and will subject the violator to penalties.

For calculations on exams, you should bring a stand-alone calculator (preferably one with basic

financial functions such as NPV, PV, PMT); mobile phones and other electronic devices are not allowed,

so you will not be able to rely on calculator apps or spreadsheets. If you already have a non-financial

calculator, it will be sufficient, but less convenient than a financial one. If you do not already own a

calculator, it is a good idea to buy one well in advance of the midterm so you will be familiar with its use.

You can buy basic financial calculators from HP or TI for as little as $30 (Amazon).

Students must take the exams at the scheduled times except in the case of serious (documented)

illness or equally compelling circumstances. If you think you have a compelling non-illness reason, you

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should discuss it with Prof. Nichols as early as possible to see if your reason qualifies, before you make

any commitments. For example, leaving town early to get lower air fares is not a compelling reason.

G. Course Grades

Your final course grade will be based primarily on a weighted average of percentage scores on

problem sets (10 percent), contributions to case and other class discussions (20 percent), the mid-term

exam (22 percent), the final exam (48 percent). We will rank class members based on their weighted

average scores. There is no predetermined relationship between percentage scores and final grades.

Instead, grades will be assigned based on the ranks (with adjustments at the margin for improved

performance from the midterm to the final) so that the distribution of final grades in the course will

comply with the ranges of the HKS recommended distribution (which has a median grade of B+, which

corresponds to a “Pass” on the GSD scale).

We will not assign letter grades to individual assignments or exams. However, to give you a

rough sense of where you stand, we will post the distributions of scores on the exams and will indicate

after the midterms whether your class participation is “satisfactory” or “needs improvement.”

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Summary Course Calendar MONDAY WEDNESDAY FRIDAY

AUGUST-

SEPTEMBER

Aug. 31:

Shopping day I. Markets

C1-Sept. 2:

Intro to course and to

Supply and Demand

C2-Sept. 4:

Case: Coffee Crisis

Sept. 7: Labor Day

No class

C3-Sept 9:

Elasticities, price controls

Sept. 11:

Review session

Problem set 1 due

C4-Sept 14:

Case: Taxi Medallions and

Uber

C5-Sept 16:

Consumer and producer

surplus, with applications

to taxes and subsidies

Sept. 18:

Review session

Problem set 2 due

C6-Sept. 21:

Case: Liconsa Milk

Assistance

C7-Sept. 23:

Costs, technology, and

firm size

Sept. 25

Review session

Problem set 3 due

SEPTEMBER-

OCTOBER

C8-Sept. 28:

Case: Nicaragua Electricity

C9-Sept 30:

The cost of capital,

discounting and

amortization

Oct. 3

Review session

Problem set 4 due

C10-Oct. 5:

Profit Maximization

C11-October 7:

Case: Sullivan Gray Riat Oct. 9: Review session

Problem set 5 due

Oct. 12:

Columbus Day, no class

C12-October 14:

Short- and long-run

equilibria in competitive

markets

Oct. 16:

Review session

Ungraded optional problem

set with answers available

C13-Oct. 19:

MIDTERM EXAM

II. Market Efficiency &

Market Failure

C14 – Oct. 21:

Pareto efficiency and an

overview of market

failure

Oct. 23:

Review session

Problem set 6 due

C15-Oct. 25:

Case: Parking in San

Francisco

C16-Oct. 28:

Imperfect competition:

Monopoly

Oct. 30:

Review session

Problem set 7 due

November C17-Nov. 2:

Price discrimination,

oligopoly and game theory

C18-Nov. 4:

Case: US Airways-

American Airlines Merger

Nov. 6:

Review session

Problem set 8 due

C19-Nov. 9:

Case: Corporate Average

Fuel Economy Standards

Nov. 11: Veteran’s Day,

no class

Nov. 13:

Review session

Problem set 9 due

C20-Nov. 16:

Public goods and benefit-fit

cost analysis

C21-Nov. 18:

Case: Arsenic in drinking

water

Nov. 20:

Review session

Problem set 10 due

C22-Nov. 23: Case: Boston Convention

Center Expansion

Nov. 25:

Thanksgiving break, no

class

Nov. 27:

Thanksgiving break, no

problem set

November-

December

C23-Nov. 30: Alternative remedies for

externalities

C24-Dec. 2:

Case: California Global

Warming Solutions

Dec. 4:

Review session

Problem set 11 due

Monday, December 14, 3-6pm—FINAL EXAM—room TBA

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Class Meetings, Readings and Assignments

Note: Additional short readings may be assigned and some non-case classes will have a short problem

assigned to be completed before class for discussion. Any changes will be posted on the Canvas site.

Monday, August 31, HKS “Shopping day”

Overview of course and requirements.

Optional but recommended because we will not discuss requirements at the first regular class.

I. Markets

A. Supply, Demand, and Market Equilibrium

Wednesday, September 2, Class 1

Introductions, supply, demand, and market equilibrium

Read:

Pindyck and Rubinfeld—Ch. 1 (skim all); read Ch. 2 (§§2.0-2.5, 2.6 optional).

Nixon, Ron and Annie Lowrey, “Drought Forces Reductions in U.S. Crop Forecasts,” New York

Times, August 11, 2012, http://www.nytimes.com/2012/08/11/business/projections-for-corn-

yield-falls-to-17-year-low.html?pagewanted=all&_r=0

Wendle, Abby. “Pain From The Grain: Corn Belt Towns Languish As Prices Drop,” Tri-State Public

Radio. March 18, 2015, http://www.npr.org/sections/thesalt/2015/03/18/393841311/pain-from-

the-grain-corn-belt-towns-languish-as-prices-drop (you can read the transcript or listen to the

recording).

Assignment:

Please analyze the questions below and come to class prepared to discuss your analyses. Consider the

following changes that affect the market for corn:

1. The severe drought of 2011/2012

2. Increasing regulatory requirements for the use of corn-based ethanol in gasoline

3. The impact of reduced consumption of beef for health reasons (most corn is used as animal feed)

4. Real incomes increase

5. (1) and (2) together

6. (2) and (3) together

7. Increase in the price of soybeans

For purposes of this question, assume the market for corn is competitive. For each change, specify (a)

whether it shifts supply or demand, (b) the direction (in/out) of the shift, and (c) the net impacts (increase/

decrease/no change/indeterminate) on the price and quantity of corn.

Friday, September 4, Class 2

Case: Supply, demand, and prices—The Coffee Crisis

Read:

Learning by the Case Method, HKS note N15-86-1136.00 (helpful tips on how to prepare for case

discussions, written by two former instructors of this course)

The Coffee Crisis, HKS case 1776.0

Assignment:

Imagine that you are the Minister of Agriculture for some relatively high-cost Arabica producer, such

as Costa Rica or El Salvador. Would you advise your farmers to get out of coffee? In formulating

your answer, please consider:

1. What influences consumers’ demand for coffee products in the short run (the next year or two)?

In the long run (five or more years)? How sensitive is consumption to wholesale coffee bean

prices in producing countries?

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2. What are the determinants of the supply of coffee in the short run? In the long run? How sensitive

is supply to wholesale coffee bean prices in producing countries?

3. Do you think Arabica prices are likely to rise or fall in the next five years? How confident are

you?

4. If all producers in a given country have the same costs, how could you use the information in the

case (Exhibits 5 and 7) to derive a rough long-run supply curve based on the fact that in the long

run, price must exceed cost if a company/country is to produce? Optional: Derive the curve

based on the numbers in the exhibits. For your convenience, the key information in exhibits 5 and

7 has been entered into a spreadsheet posted with the case (“Coffee case data for deriving supply

curve.API-105A.Fall 2015.xlsx”). There are also some suggestions posted for simplifying the

problem. Is the current price-quantity pair on that long-run supply curve? Why or why not?

Monday, September 7, Labor Day holiday—NO CLASS

Wednesday, September 9, Class 3

More on elasticities, price controls.

Read:

Pindyck and Rubinfeld—Ch. 2 (§2.7)

Zernike, Kate. “Gasoline Runs Short, Adding Woes to Storm Recovery,” New York Times, November

1, 2012, http://www.nytimes.com/2012/11/02/nyregion/gasoline-shortages-disrupting-recovery-

from-hurricane.html?pagewanted=all&_r=0

Gormley, Michael. New York cracks down on gas price gouging after Hurricane Sandy, WABC

News, May 2, 2013. http://7online.com/archive/9087737/

Zerba, Amy and Patrick McGeehan, “A Guide to New York’s $15 Minimum Wage Proposal,” New

York Times, July 23, 2015. http://www.nytimes.com/2015/07/25/nyregion/new-york-15-

minimum-wage-what-fast-food-workers-need-to-know.html

Romer, Christina D. “The Business of the Minimum Wage,” New York Times, March 2, 2013,

http://www.nytimes.com/2013/03/03/business/the-minimum-wage-employment-and-income-

distribution.html?pagewanted=all

Friday, September 11:

Review session (optional) at 8:40 am, L-130

Problem Set 1 due

Paper submissions: Due by 5 pm in lock box under student mailboxes outside L-280.

Electronic submissions due by 6 pm via Canvas

Monday, September 14, Class 4

Case: Taxis vs. Ride-sharing services

Read:

Badger, Emily. “Taxi medallions have been the best investment in America for years. Now Uber may

be changing that,” Washington Post wonk blog, June 21, 2014.

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/06/20/taxi-medallions-have-been-the-

best-investment-in-america-for-years-now-uber-may-be-changing-that/

“New York City's yellow cab crisis,” CNN Money, Jul 21, 2015.

http://money.cnn.com/2015/07/21/news/companies/nyc-yellow-taxi-uber/ (read or watch video).

Dan Adams and Jack Newsham. “Cambridge taxi drivers strike to protest Uber, Lyft,” Boston Globe,

August 3, 2015. http://www.bostonglobe.com/business/2015/08/03/cambridge-taxi-drivers-start-

day-strike/jRRN9oHExMkvLgnRSHUstL/story.html

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Assignment:

Under what conditions, if any, should cities allow Uber and similar services to operate in competition

with licensed taxis? In formulating your answer, please consider:

1. How does limiting the number of medallions affect taxi fares and the number of rides? What

determines the price of a medallion? (Hint: do the medallions drive a wedge between the supply

and demand prices? Where does the revenue represented by that gap go?)

2. What are the costs and benefits of limiting the number of licenses through a medallion system?

Who wins and who loses?

3. How does the introduction of ridesharing services like Uber affect the market for taxis and the

value of medallions?

4. Where government regulation has created valuable assets, should it compensate the owners of

those assets if changes in regulation sharply reduce their value?

B. Consumer’s and Producer’s Surplus: Taxes and Subsidies

Wednesday, September 16, Class 5

Consumer and producer’s surplus with applications to taxes and subsidies

Read:

Pindyck and Rubinfeld— Ch. 4 (§4.4 only); Ch. 9 (§§9.1-9.3, 9.6)

Glaeser, Edward. “Cash is better than food stamps for the poor,” Bloomberg View, February 27,

2012., http://www.bloombergview.com/articles/2012-02-28/cash-better-than-food-stamps-in-

helping-poor-commentary-by-edward-glaeser

Greiff, James. Replacing Food Stamps With Cash Is a Terrible Idea,” Bloomberg View, October 7,

2013. http://www.bloombergview.com/articles/2013-10-07/replacing-food-stamps-with-cash-is-a-

terrible-idea

Cochrane, Joe. “Indonesia Struggles to End Fuel Subsidies,” NYT, May 2, 2013.

http://www.nytimes.com/2013/05/03/business/global/03iht-subsidy03.html

Friday, September 18:

Review session (optional) at 8:40 am, L-130

Problem Set 2 due

Paper submissions: Due by 5 pm in lock box under student mailboxes outside L-280.

Electronic submissions (single file) due by 6 pm via Canvas

Monday, September 21, Class 6

Case: Assisting the poor: Liconsa and the Program of Social Assistance for Milk

Read:

Liconsa and the Program of Social Assistance for Milk, HKS case 1766.0

Assignment:

Please come prepared to explain whether you think Liconsa's milk program should be replaced by the

Oportunidades/Progressa program. In formulating your position please consider:

1. What are the advantages and disadvantages of Liconsa's milk program as a means of helping the

poor?

2. Is the Oportunidades/Progressa program better?

3. Would giving the poor money without strings be even better?

4. Challenging: Consider the information on consumption with and without Liconsa for various

groups (e.g., all urban, poorest rural) in Exhibit 1. Can you tell whether the value of Liconsa to

them (as measured by consumer surplus) is less, more, or the same as the cost to the government?

Hint: What “supply” curve faces a family that is not in Liconsa? For a family in Liconsa, what

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does the supply curve look like given that the subsidized price does not apply for quantities

greater than 4 liters/beneficiary? For a “typical” member of each group, plot where the quantities

consumed fall along these supply curves.

C. The Firm: Production, Costs and the Competitive Supply Curve

Wednesday, September 23, Class 7

Costs, technology, and firm size

Read: Pindyck and Rubinfeld—Ch. 6 (all), Ch. 7 (§§7.0-7.4).

Friday, September 25:

Review session (optional) at 8:40 am, L-130

Problem Set 3 due

Paper submissions: Due by 5 pm in lock box under student mailboxes outside L-280.

Electronic submissions (single file) due by 6 pm via Canvas

Monday, September 28, Class 8

Case: The structure of costs: Rural Electrification in Nicaragua

Read:

Rural Electrification in Nicaragua (abridged), HKS case 1705.3

“ A brightening continent,” The Economist, January 17, 2015.

http://www.economist.com/news/special-report/21639018-solar-giving-hundreds-millions-

africans-access-electricity-first

Assignment: Come to class prepared to advise the National Commission on Energy on whether its

consultants have chosen the appropriate technologies for the El Ayote pilot communities. In fashioning

your advice, please consider:

1. How do the costs of solar, diesel, and hydro compare? What are the marginal costs of each

technology? What are the fixed costs? How do the relevant time horizons differ?

2. How much do you think residents might be willing to pay (WTP) for electricity service from a

diesel- or hydro-powered mini-grid or from a PV system? How do you think WTP varies with the

amount consumed?

3. How should uncertainties and potential future changes in technology affect your decision today?

Wednesday, September 30, Class 9

The cost of capital: discounting and amortization

Read:

Pindyck and Rubinfeld—Ch. 15 (§§15.0-15.4, 15.6-15.7. §§15.5 and 15.8 are optional)

Nichols, Albert. “Notes on Discounting, Present Values, and Amortization”

Friday, October 2:

Review session (optional) at 8:40 am, L-130

Problem Set 4 due

Paper submissions due by 5 pm in lock box under student mailboxes outside L-280 or

Electronic submissions (single file) due by 6 pm via Canvas

Version: 8/26/2015 Syllabus

Harvard Kennedy School API-105A

Fall 2015-2016 Markets and Market Failure with Cases

12

Monday, October 5, Class 10 Profit maximization and the firm’s choice of price and quantity

Read:

Pindyck and Rubinfeld—Ch. 8 (§§ 8.0-8.4), Ch. 10 (§§10.0-10.1, but only through figure 10.3 in

§10.1).

Wednesday, October 7, Class 11

Case: Pricing and competitive strategy—Sullivan, Gray, Rait

Read:

Sullivan Gray Rait, GSD case.

Assignment:

Come to class prepared to explain the price you would quote to Max Reptan for the Gahanna job if

you were Gary Gray or Mike Whaley. In formulating your position please consider:

1. How did Gary Gray and Mike Whaley justify their original $56,000 bid? On what basis are they

now considering dropping the bid to $41,000?

2. What role should costs play in their calculations? What are the relevant costs?

3. What other considerations besides costs are important in formulating the bid?

Friday, October 9:

Review session (optional) at 8:40 am, L-130

Problem Set 5 due

Paper submissions due by 5 pm in lock box under student mailboxes outside L-280.

Electronic submissions (single file) due by 6 pm via Canvas

Monday, October 12: Columbus Day Holiday – No Class

Wednesday, October 14, Class 12

Perfect competition, long run equilibrium, and the industry supply curve

Read:

Pindyck and Rubinfeld, Ch. 8 (§§8.5-8.8; review §§8.0-8.4 assigned earlier)

Friday, October 16:

Review session (optional) at 8:40 am, L-130

Optional ungraded problem set

Do not submit, but recommended as preparation for exam. Answers will posted.

Monday, October 19, Class 13

MIDTERM EXAM: 75 minutes, in class

II. Market Efficiency and Market Failure

Detailed day-by-day assignments for second half will be posted later

Monday, December 14 FINAL EXAM

3-6pm, location TBA.