Harvard API101 Markets and Market Failure

… one of the Specimen Courses in Economic Analysis

Click for syllabus

Course description

This course applies microeconomic reasoning to public issues, policies and programs. It considers economic incentives and organizations; models of economic behavior; the operation of markets; the price system and how it works; the consequences of market failure and interventions in markets; and policy objectives and instruments. All sections cover a common set of core topics and the problem sets, midterms, and finals will be identical and graded jointly across all sections.


Janina Matuszeski, David Ellwood, Pinar Dogan (Fall 2016)


https://www.hks.harvard.edu/syllabus/API-101B.pdf, accessed 9 March 2017.

Syllabus link on Atlas (Fall 2016)


Alignment between class topics and Atlas core normed topics
API101 Class Topic
Closest Normed Topic
1 Introduction, Thinking at the Margin, Supply and Demand The Study of Economics
2 Taxes, Subsidies, Price Controls, Elasticity

Confronting Inequality: Minimum Wages, Wage Subsidies, Food Subsidies, Price Supports

Commodity Taxes and Subsidies
3 Trade: Quotas and Tariffs

Indifference Curves; Budget Lines; Utility Maximization

Trade, Adjustment, and Protectionism

The Price System and Price Regulation

4 The Law Of Demand; Market Demand

Policy Applications: Vouchers, Grants, Subsidies

Consumer Theory and Elasticity of Demand and Supply
5 Intertemporal Consumption Decisions

Behavioral Insights for Consumer Theory

Labour Markets, Transfers, and Personal Taxes
6 Profit Maximization

Thinking at the Margin: Marginal Cost and Marginal Revenue

Producer Theory and Competition
7 Relevant and Irrelevant Costs Producer Theory and Competition
8 Monopoly: Sources Of Monopoly Power; Innovation; Abuse of Market Power

Monopoly: Market Power and Price Discrimination

Monopoly and Price Discrimination
9 Oligopoly; Cournot Model

Prisoner’s Dilemma; Basics of Game Theory

Supply, Demand, and Equilibrium
10 Asymmetric Information and Adverse Selection

Moral Hazard

Asymmetric Information, Signaling, and Game Theory
11 Externalities

Applications of Externalities; Pollution Control

12 Public Goods

Additional Topics and Review

Public Goods and Commons Problems

The API101 syllabus addresses all 12 of the 12 Atlas topics in the Atlas subject of Economic Analysis.

Additional description from the Syllabus


The primary textbook for this course is:

Microeconomics, Eighth Edition, by Robert S. Pindyck and Daniel L. Rubinfeld (Prentice-Hall, 2012), hereafter referred to as P&R.

Be aware, however, that the course is only loosely linked to this book and you are encouraged to use other textbooks if this one does not meet your needs. The book is on reserve at the HKS library and can be purchased at the COOP.

A second textbook for this course is:

Core-Econ Project, an ebook which can be accessed at http://www.core-econ.org/ebook/. You will need to sign up with your Harvard email address in order to gain access to the ebook.


The formal course requirements are: completion of nine problem sets, a midterm examination, and a final examination. The problem sets will count for 10 percent of the final grade, the midterm will count for 40 percent, and the final for 50 percent. The examinations will be “in-class”; books and notes cannot be consulted during examinations. Note that the midterm will be held on Wednesday, October 19, from 10:15 to 11:30 AM for all sections. The final exam will be held on Monday, December 12 from 3:00 to 6:30 PM for all sections. The final exam will be cumulative. Please check your calendars as soon as possible and avoid any scheduling conflicts for the midterm and the final. We will not schedule makeup exams except for students with documented dire emergencies (e.g., you are admitted to a hospital).

A problem set will be assigned (and due) almost every week. They will give you hands-on experience with the techniques and concepts taught in the course. It will be extremely difficult to perform well in the midterm and final unless you devote time (about 6 to 8 hours per week) to working out these problems. The problem sets will be graded on the check-plus/check/check-minus basis, which will correspond to 1, 2, or 3 points out of 3 points total per problem set. Each problem set will count for one point of the final grade (for a total of 9 points plus 1 freebie point that we generously allot to all students). Problem sets are due at the beginning of class on the due date. If a problem set is not turned in by this time, it is considered late and you will receive no credit. Class participation is strongly encouraged but will not be graded.

Small groups of students (no more than 4) are strongly encouraged to work together on the problem sets. However, problem solutions must be written independently by each of the students in your small group. This is to ensure that what you turn in reflects your own understanding of how to do the problems. In addition, you must indicate the name of the students in your group at the top of your solutions. Problem set solutions will be posted on the class website shortly after each problem set is turned in.

There is a weekly review session conducted by the Teaching Fellow (TF) for your section. You are encouraged but not required to attend this session.

The letter grade that will appear on your transcript will be determined by the sum of the midterm, final, and problem set numerical grades. We will rank all students across all sections from highest to lowest grade, and use the (more generous) Dean’s recommended grade curve to determine the letter grade. The curve is as follows: 15% A, 25% A-, 35% B+, 20% B, and 5% B- or less.

Across this course, you are expected to abide by the University policies on academic honesty and integrity as given in the Student Handbook. Violations of these policies will not be tolerated and are subject to severe sanctions up to and including expulsion from the university. At least one of the faculty for this course has been involved in an academic integrity case which resulted in the student not graduating.

The Z Section

The Z Section of this course uses calculus. We encourage students to try out the Z section if they think it might be a good fit. Using calculus can help build your economics intuition if you are comfortable using it. Or you may find it easier to build your economics intuition without using calculus. Because the math of the Z section allows material to be taught more rapidly, this section covers a few more topics and goes into a bit more depth than the non-calculus sections. However all four sections of API-101 cover the same core material. You may switch into that section up until noon on October 21, 2016. After noon on October 21, you may not switch into or out of the Z section.

To switch sections, please email Joseph Solomon (joseph_solomon@hks.harvard.edu), with the sections you are switching between and the date you will first attend the new section. You may only switch between your assigned (B, C, or D) section and the Z section. You may NOT switch among the B, C, and D sections. You may “try out” the other section, Z or non-Z, for one class without sending this email; simply attend that section for one class.

If you do switch sections, grades will transfer from one section to the other. Problem set grades will transfer fully. However, you must submit any problem sets to the section for which you are currently registered (i.e. your original section if you have not yet emailed Joseph Solomon to formally switch). If you switch after the midterm, your midterm in your old section will count only 20% with the remaining 20% weight being transferred to the final exam.

Class Logistics

1. Our past experience suggests that student use of electronic devices can be very disruptive to the flow of the class. As a result, no mobile phones, tablets, PDAs, or laptops may be used in class. We will, of course, make whatever exceptions are necessary if there is a documented need. Please have the relevant administrator contact the instructor if you fall in this category. In addition, for a few specific classes, a laptop or smartphone will be required for an in class simulation. However, even on these days, you may not use your electronic device other than for that specific class-related exercise.

2. We have also found that tardiness is extremely disruptive. During the first class, each faculty member will share his or her policy which may include a negative impact on a student’s grade for each late arrival. (In the language of API-101, we are imposing a Pigou tax on those who impart a negative externality on the rest of the class.)

Course topics and readings

Supply and Demand

Week 1a: Introduction, Thinking at the Margin, Supply and Demand

P&R, Chapters 1 and 2, pp. 3-57.

Week 1b: Organic Apples – A Market Simulation

P&R, Chapters 1 and 2, pp. 3-57.

Week 2a: Taxes, Subsidies, Price Controls, Elasticity

P&R, Chapters 1 and 2, pp. 3-57; Chapter 9, pp. 345-351.

Week 2b: Confronting Inequality: Minimum Wages, Wage Subsidies, Food Subsidies, Price Supports

P&R, Chapters 1 and 2, pp. 3-57; Chapter 9, pp. 345-351.

Week 3a: Trade: Quotas and Tariffs

P&R, Chapter 9, pp. 340-344.

Consumer Theory

Week 3b: Indifference Curves; Budget Lines; Utility Maximization

P&R, Chapter 3, pp. 67-75, 78-100.

Week 4a: The Law Of Demand; Market Demand

P&R, Chapter 4, pp. 111-116, 118-135; students with a strong mathematical background are encouraged to also read pp. 149-157.

[Optional] Christy, Bryan. 2012. “Ivory Worship.” National Geographic, pp. 1-10.

Week 4b: Policy Applications: Vouchers, Grants, Subsidies

[Optional] Raymundo, Edgar. HKS Case 1766. “Liconsa and the Program of Social Assistance for Milk,” pp. 1-8.

[Optional] Porter, Eduardo. 2013. “Dropping Out of College and Paying the Price.” New York Times, 06/23/2013, pp. 1-5.

Week 5a: Intertemporal Consumption Decisions

P&R, Chapter 15, pp. 561-563.

Week 5b: Behavioral Insights for Consumer Theory

P&R, Chapter 5, pp. 189-196.

[Optional] Sunstein, Cass and Richard H. Thaler. 2003. “Libertarian Paternalism is not an Oxymoron,” The University of Chicago Law Review 70:4, pp. 1159-1202.

Producer Theory

Week 6a: Profit Maximization

Core-Econ Project, Chapters 7.1, 7.3, 7.4, and 8.3.

Week 6b: Thinking at the Margin: Marginal Cost and Marginal Revenue

P&R, Chapter 8, pp. 282-287; Chapter 10, pp. 358-368.

Core-Econ Project, Chapter 7.5.

Week 7a: Relevant and Irrelevant Costs

P&R, Chapter 7, pp. 229-253.

Core-Econ Project, Chapter 7.1 and 7.2.

[Optional] Thaler, Richard H. 2015. “Sunk Costs.” Misbehaving: The Making of Behavioral Economics, W.W.Norton & Company, pp. 64-73.

Week 7b: Midterm

Market Failure: The Lack of Competition or Information

Week 8a: Monopoly: Sources Of Monopoly Power; Innovation; Abuse of Market Power

P&R, Chapter 10, pp. 368-377.

Core-Econ Project, Chapters 7.7 and 8.2.

[Optional] Gilbert, Richard J. and Michael L. Katz. 2001. “An Economist’s Guide to US v. Microsoft.” Journal of Economic Perspectives, 15 (2): 25-44.

[Optional] Moser, Petra. 2013. “Patents and Innovation: Evidence from Economic History.” Journal of Economic Perspectives, 27 (1): 23-44.

Week 8b: Monopoly: Market Power and Price Discrimination

P&R, Chapter 11, pp. 400-410.

[Optional] Shapiro, Carl and Hal R. Varian. 1998. “Versioning: The Smart Way to Sell Information.” Harvard Business Review, pp. 106-114.

[Optional] Dunt, Emily, Joshua S. Gans, and Stephen P. King. 2002. “The Economic Consequences of DVD Regional Restrictions.” Economic Papers, Volume 21 (1), pp. 32-45.

[Optional] Mcafee, R. Preston. 2007. “Pricing Damaged Goods.” Economics: The Open-Access, Open-Assessment E-Journal, (2007-1), pp. 1-19.

Week 9a: Oligopoly; Cournot Model

P&R, Chapter 12, pp. 456-466 (not including the Stackelberg Model), 477-482.

Week 9b: Prisoner’s Dilemma; Basics of Game Theory

P&R, Chapter 13, pp. 487-494, 502-505; Chapter 12, pp. 469-471.

Week 10a: Asymmetric Information and Adverse Selection

P&R, Chapter 17, pp. 631-642.

Week 10b: Moral Hazard

P&R, Chapter 17, pp. 643-645.

Market Failure: Externalities

Week 11a: Externalities

P&R, Chapter 18, pp. 661-666, 684-687.

Week 11b: Applications of Externalities; Pollution Control

P&R, Chapter 18, pp. 667-677.

Week 12a: Public Goods

P&R, Chapter 18, pp. 687-694.

Week 12b: Additional Topics

Week 13a: Review

Page created by: Ian Clark, last modified 9 March 2017.