Policy Analysis: Frameworks

and Models
Stokey and Zeckhauser Ch1-3
Jenkins-Smith Ch1-3
Weimer and Vining Ch1-2
Where 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
Stokey and Zeckhauser: Framework
for Analysis
What do you do when a complicated
policy issue lands on your desk?
1. Establish the context
2. Lay out the alternatives
3. Predicting the consequences of each
alternative including likelihood
4. Valuing the outcomes
5. Making a choice

These are craftsmans tools you must

learn to wield them with skill.
Models
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.
More 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)
1. First, construct a descriptive model that encompasses all
choices open to the decision maker and predicts the outcome
of each
2. A set of procedures for choosing among alternative actions
given the decision makers preferences among the outcomes.
A couple more

Deterministic: the outcome is assumed

to be certain. Natural Laws: E=mc2
Probabilistic: Where the outcome of a
particular action is not unique, instead
there is a range or a number of possible
outcomes.
Judging 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?)
Why 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?
The Model of Choice

Allocating scarce resources with a

focus on the public sector

There are two primary elements of any

act of choice:
1. The alternatives available to the decision maker
2. The decision makers preferences among the alternatives

Trade-offs are the essence of difficult decisions

This model assumes little significant uncertainty
Alternatives 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 S&Z
More
The possibility frontier: the set of efficient alternatives.
The frontier may be straight or curved, continuous or
discrete, or a few isolated points.
Electricity This curve tells us the maximum achievable
(thousands of
kwh/day) output of water for every possible output of
20 electricity. Point F indicates that with an
E
electrical output of 8 thousand kwh, the
i
maximum water output is 32 million gallons,
and conversely.
10 F
i

W
0 10 20 30
i 40
Water (millions of gallons/day)
The decision makers preferences
The 2nd element of the fundamental
choice model describes the decision
makers preferences Indifference Curves
Electricity
(thousands of
kwh/day)
iS Each of these points are found to
20 be equally satisfactory and all of
iR those along the curve they lie on
the same indifference curve
because they are equally
10 satisfactory.
P
i I1

iQ
0 10 20 30 40
Water (millions of gallons/day)
A 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
Electricity
these levels of satisfaction, we say I1 is better
(thousands of than I0. Also, there is no implication that
kwh/day)
movements of equal distance across the graph
20
are equally valuable. Things get better as we
move north and east. Such a family of curves
is called an indifference map.

10

I3
I2
I1
I0
0 10 20 30 40
Water (millions of gallons/day)
The Best Choice
Here we combine the continuous
possibility frontier and the indifference
map.
The best choice for the planner is the
Electricity
(thousands of combination of electricity and water
kwh/day)
represented by point __.
20 E This is because only at that point can the
i planner reach the highest possible
G indifference curve.
i
T
10 i
F
i
W
0 10 20 30
i 40
Water (millions of gallons/day)
MRT
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
0 10 20 30
i 40
Water (millions of gallons/day)
MRS
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) iM
20

10
N
i
I1

0 10 20 30 40
Water (millions of gallons/day)