1. The Players and the Goals Two types of consumers Non-smokers (eat pizza) Smokers (eat pizza and smoke) Consumers’ goal: Maximize utility

2. The Players and the Goals Two types of firm Pizza firms make and sell Pizza Cigarette firms make and sell Cigarettes Each firm’s goal: Maximize profit Profit = Ending $

3. Objects = 1 Cigarette = 1 Pizza = 1 dollar Pizza $ Cigarette

4. Phases of Play 1.Goods market round Non-smokers buy Pizza from Pizza firms for $. Pizza $

5. Phases of Play 1. Goods market round Smokers buy Pizza from Pizza firms for $, and Cigarettes from Cigarette firms for $. Pizza $ Cigarette

6. Phases of Play 1. Goods market round The catch:Second hand smoke is annoying to non- smokers. Smoker #1’s second hand smoke annoys Non-smoker #1. Smoker #2’s second hand smoke annoys Non-smoker #2. Etc.

7. Phases of Play 1. Goods market round Smokers Utility = (Cigarettes + 1) (Pizza) Non-smoker #1 Utility = Pizza – Smoker #1’s Cigarettes Non-smoker #2 Utility = Pizza – Smoker #2’s Cigarettes etc. for all Non-smokers.

8. Utility and Profit Round 1. Non-smokers report Pizza purchased. 2. Smokers report Pizza and Cigarettes purchased. 3.Pizza firms report ending cash. 4.Cigarette firms report ending cash.

9. Trading Rules Firms must remain in their seats. Firms display cards indicating their ask prices. Consumers may only purchase 1 unit of product at a time.  Runner purchases one unit, takes it to manager, goes back and purchase another unit, etc.  Manager calculates impact on utility of hiring one more product of each type.

10. Ready to begin…

11. Goods Market Round Non-smokers buy Pizza for $. Smokers buy Pizza and Cigarettes for $. Non-smoker #n Utility = Pizza – Smoker #n’s Cigarettes Smokers Utility = (Cigarettes + 1) (Pizza)

12. Utility and Profit Round 1. Non-smokers report Pizza purchased. 2. Smokers report Pizza and Cigarettes purchased. 3.Pizza firms report ending cash. 4.Cigarette firms report ending cash.

13. New Rule Non-smokers have successfully lobbied the government to outlaw smoking. Cigarette firms no longer exist.

14. Ready to begin…

15. Goods Market Round Non-smokers buy Pizza for $. Smokers buy Pizza and Cigarettes for $. Non-smoker #n Utility = Pizza Smokers Utility = Pizza

16. Utility and Profit Round 1. Non-smokers report Pizza purchased. 2. Smokers report Pizza purchased. 3.Pizza firms report ending cash.

17. New Rule Smokers may purchase the right to smoke from Non-smokers. = 1 smoking voucher (each) 1 smoking voucher entitles the smoker to smoke 1 cigarette.

18. New Rule Smokers may purchase the right to smoke from Non-smokers. Pizza $ Smoker #1 may buy vouchers only from Non-smoker #1. Smoker #2 may buy vouchers only from Non-smoker #2. etc.

19. Ready to begin…

20. Goods Market Round Non-smokers buy Pizza for $. Smokers buy Pizza, Cigarettes, and vouchers for $. Smokers Utility = (Cigarettes + 1) (Pizza) Non-smoker #n Utility = Pizza – Smoker #n’s Cigarettes

21. Utility and Profit Round 1. Non-smokers report Pizza purchased. 2. Smokers report Pizza, Cigarettes, and vouchers purchased. 3.Pizza firms report ending cash. 4.Cigarette firms report ending cash.

22. Results…

23. The experiment simulated three conditions 1.Undefined rights  No one owned the air. 2.Non-transferable rights  Non-smokers owned the air, but they could not sell the air to smokers. 3.Transferable rights  Non-smokers owned the air and could sell the air to smokers.

31. Civil Society vs. Political Society The appropriate role for government is the protection of rights. In a political society, people also rely on the government to restrict rights of others for the common good. In a civil society, people freely choose not to exercise their rights in mutual exchange.

32. Civil Society vs. Political Society The problem with asking the government to restrict rights for the common good is that the government does not know what the appropriate level of restriction is. When the government restricts markets, prices cannot emerge and so there are no value metrics on which to base decisions.

33. Civil Society vs. Political Society Example Government provided primary and secondary education. Common good = “high test scores” (as a proxy for quality of education) Problem #1:With no prices, the appropriate level of quality is unknowable (zero is as bad as infinity). Problem #2:Without a profit motive, there is no incentive to find the drivers of quality education. Instead, incentive is to find the drivers of revenue.

34. Civil Society vs. Political Society Question With respect to public primary and secondary education, what drivers might impact educational quality? Example: Student-teacher ratio

35. Source: National Center for Education Statistics, U.S. Department of Education Student-teacher ratio has no apparent impact on NAEP scores.

36. School size has no apparent impact on NAEP scores. Source: National Center for Education Statistics, U.S. Department of Education

37. Spending per Pupil has no apparent impact on NAEP scores. Source: National Center for Education Statistics, U.S. Department of Education

38. Median Family Income has no apparent impact on NAEP scores. Source: National Center for Education Statistics, U.S. Department of Education

39. Civil Society vs. Political Society Maybe standardized test scores are the wrong proxy for quality. What about the drop-out rate?

40. Spending per Pupil has no apparent impact on dropout rate. Source: National Center for Education Statistics, U.S. Department of Education

41. Median Family Income has no apparent impact on dropout rate. Source: National Center for Education Statistics, U.S. Department of Education

42. Civil Society vs. Political Society Does aggregating data at the state level hide information? What happens if we look at the school district level?

43. Each dot represents one school district in Minnesota.

44. Spending per pupil has no apparent impact on test scores.

45. Civil Society vs. Political Society Does nothing impact educational quality? Performance is not random -- it is predictable.

46. For 8 th grade, past NAEP scores predict future NAEP scores. Source: National Center for Education Statistics, U.S. Department of Education

47. 4 th grade NAEP scores predict 8 th grade NAEP scores. Source: National Center for Education Statistics, U.S. Department of Education

48. Civil Society vs. Political Society The fact that schools exhibit a consistency in performance indicates that performance is not random. Performance drivers are unknown to the government because the government does not have the incentive and/or the ability to find them.

49. Civil Society vs. Political Society The achievement of a civil society requires two things: 1.A set of laws and institutions that define and protect property rights. 2.The freedom to act in the market place free from government coercion.

50. Civil Society vs. Political Society Without political freedom, economic freedom is unattainable. Without economic freedom, political freedom is meaningless.