Cartoon Book Excerpt

N.
Gregory Mankiw, Professor of Economics, Harvard University, and author of Principles of Economics
Googles chief economist, Hal Varian, once wrote, You

dont need a brand-new economics. You just need to see
the really cool stuff, the material they didnt get to
when you studied economics. The Cartoon Introduction
to Economics is all about integrating the really cool
stuffsuch as auction theory, adverse selection, and the
Prisoners Dilemmainto the funniest and most
digestible overview of microeconomics youll ever read.
Hilarity and economics are not often found together, but this book has a lot of both.
It also does a great job of explaining important economic concepts simply, accurately,
and entertaininglyquite a feat. Eric Maskin, Nobel Laureate in Economics
Bauman and Klein present solid basic economics in a brilliant cartoon wrapper.The
authors successfully shine a happy light on the dismal science.
Hugo Sonnenschein, Distinguished Service Professor and President Emeritus, University of Chicago
This is a seriously funny book! Klein and Bauman offer an enlightening and entertaining
look at why our day-to-day choices matter and how they all combine.Students will find
this a great addition to their textbooks, and critics of the discipline will learn what
economics is really about. Diane Coyle, author of The Soulful Science
Had Art Spiegelman and John Maynard Keynes collaborated on a comic
book on economics, they could only have dreamed of coming up with
something this good. Jonathan A.Shayne, a.k.a.Merle Hazard,
country singer and founder of Shayne & Co., LLC
A freelance cartoonist, illustrator, and animator,

Grady Klein is the creator of the Lost Colony
series of graphic novels.
$17.95
BUSINESS / GRAPHIC NOVELS
ISBN: 978-0-8090-9481-3
5 1 7 9 5
>
Cover art and design by Grady Klein

Photograph of Grady Klein Anne Caswell Klein
Photograph of Yoram Bauman Andrea M.Lee
Hill and Wang
The
cartoon
introduction to
economics
volume one: microeconomics
klein and bauman
An environmental economist at the University of

Washington (and a part-time teacher at Seattles
Lakeside High School), Yoram Bauman also
performs around the world as the worlds first
and only stand-up economist.
The cartoon introduction to economics

volume one: Microeconomics
Learning economics should be fun.

Klein and Bauman make sure that it is.
A division of Farrar, Straus and Giroux

www.fsgbooks.com
9
7 80809
09 4 8 1 3
www.cartooneconomics.com
novel
graphics
By Grady Klein and
Yoram Bauman, Ph.D.
hill
and
wang
the Worlds first and only Stand-up Economist
contents
PART ONE:
THE OPTIMIZING
INDIVIDuAL
PART TWO:
STRATEGIC
INTERACTIONS
PART Three:
MARKET
INTERACTIONS
Chapter 1
Introduction, page 3
Chapter 2
Decision Trees, page 15
Chapter 3
Time, page 27
Chapter 4
Risk, page 39
Chapter 5
From One to Some, page 53
Chapter 6
Cake Cutting, page 67
Chapter 7
Pareto Efficiency, page 79
Chapter 8
Simultaneous-Move Games, page 89
Chapter 9
Auctions, page 103
Chapter 10
From Some to Many, page 117
Chapter 11
Supply and Demand, page 129
Chapter 12
Taxes, page 143
Chapter 13
Margins, page 155
Chapter 14
Elasticity, page 169
Chapter 15
The Big Picture, page 181
Chapter 16
Conclusion, page 193
Glossary
page 205
chapter
15
The big picture
economists see the world
differently.
There are powerful

market forces
all around us!
where?
apples
$1.52
The economic worldview is strongly influenced by one simple idea:
competitive markets are great!

Lots of
buyers ...
...and lots of
sellers ...
...all small relative to

the market as a whole!
hooray!
The benefits of competitive markets can be seen from the Coase theorem.
if theres nothing
to stop people from
trading ...
...then nothing will
stop people from
trading!
so buyers with
high marginal
benefits ...
...will trade with

sellers with low
marginal costs ...
...and the result will

be Pareto efficient!
182
more formally, economists often respond to the big question by talking about
a result called the Invisible Hand Theorem.
Under what
circumstances does
individual optimization
lead to outcomes that
are good for the group
as a whole?
In a perfect world,
competitive markets
will lead to a Pareto
efficient outcome!
of course, the world we live in is not perfect...

...but economists still think about competitive markets
the same way that regular people think about puppies.
Its so
adorable!
But how do we
take care of it?
here are a few

good rules:
Rule #1: Understand the
markets limitations
Rule #2: Protect
competition
Rule #3: Give the
market second
chances
183
Rule #1: understand the markets limitations.
heel!
RuFf!
RuFf!
Just like you can have a Pareto efficient outcome where one kid gets all the cake ...
I dont
have any!
Nyah
nyah!
Thhhppt!
...you can have competitive markets that lead to outcomes that

are Pareto efficient but are not what most people would consider to be good.
Im starving!
Im stuffed!
But here too economists see the world differently.

184
when addressing inequality, economists

tend to favor policies that minimize
intervention in well-functioning
competitive markets ...
something tells me
you should be really
careful about where
you drop that.
...and maximize
individual choice.
instead of directly giving
poor people goods and
services we should just
give them money.
That leaves as many
choices as possible up
to each individual ...
...And whos better
at optimizing than
the individual?
giving starving people money instead of food may sound odd, but history
shows that many famines werent caused by lack of food but by lack of money.
research by Amartya Sen, who
won the 1998 Nobel prize, showed
that some famine-stricken areas
actually exported food.
Lack of money is
the root of all evil.
Congratulations,
you win the
Nobel Prize!
185
Rule #2: Protect competition.

its dangerous
out there!
markets need referees ...

Okay, no colluding, no
price fixing, and no
hitting below the belt!
...because companies have an incentive to fix prices or form cartels or

otherwise engage in anti-competitive behavior.
psst ...
If we both
charge high
prices ...
...then well
both make
more money!
186
we learned that
on page 102!
In the 19th century, cartels were known as trusts, which is why policies
to protect competition are called antitrust policies.
I know its tempting to
collude, but if you do,
Im going to put you
behind bars!
i object to this
merger!
Its not illegal to

be big and strong,
but you better not
abuse your market
power.
here at the
antitrust
division ...
...we dont
trust anybody.
And in cases where competition is limited or impossible,

governments can work to limit the extent of damage to consumers.
No, you cant charge
$900 a month for
electricity!
Youre a
regulated
monopoly!
187
Rule #3: Give the market second chances.

we are going to
have to do some
training!
looks like
somebody had a
market failure.
Sometimes competitive markets create big messes, like pollution.

-cough-cough-
wheres the
invisible hand
when we need it?
Economists think of pollution as an external cost,

meaning a cost imposed on a third party.
Im delighted
to sell you this
gasoline!
Im delighted
to buy it from
you!
188
-cough-cough-
These external costs are at the heart of the tragedy of the commons.
optimizing behavior
by individuals ...
...can produce an
outcome ...
-cough-cough-
-cough-cough-
...that is bad for

everyone.
-cough-cough-
From the perspective of supply and demand, the problem is that external costs
create a gap between private marginal costs and social marginal costs.
ve
ina
os
lc
ar
m
ial
ve
ur
so
if i dont have to bear the

full cost of my actions,
of course im going to
pollute a lot!
external cost of
pollution
r
cu
lc
na
gi
c
st
te
iva
ma
pr
When you look at the problem this way, its easy to see that the solution proposed
by economists is to use market forces to correct market failure.
The way to
get people to
pollute less ...
...is to make
polluting
expensive!
Wow, now thats

an idea worthy of a
Nobel prize!
189
One way to make polluting expensive is to impose a

carbon tax or other type of pollution tax.
Anyone who wants to
sell fossil fuels has
to pay a carbon tax!
a properly designed pollution tax can close the gap between

private marginal costs and social marginal costs.
p
rv
os
lc
na
gi
u
tc
ve
st
o
lc
ar
lm
ina
cu
By increasing private
marginal costs ...
...the pollution tax
internalizes the
external costs!
rg
ia
oc
a
em
t
iva
pr
It sounds like magic, but dont forget what we learned about taxes:
Market forces will push
some if not all of the tax
burden from sellers
onto buyers ...
...which means well

all have to pay
higher prices for
things like gasoline!
just a half a
tank, please.
190
we can get
clean air ...
...but we cant
get a free
lunch!
an alternative to a pollution tax is

a system that involves a cap...
were going to
issue permits for a
limited amount of
pollution ...
...and you cant

pollute without
a permit!
...and trade.
Companies can
buy or sell
this gives
permits.
them maximum
flexibility...
...so they can

make Pareto
improvements by
trading!
cap-and-trade sounds very different from a Pollution tax,

but in fact theyre practically identical.
they both work by
making pollution
expensive!
Neither one is
magic, but both of
them do come with a
special bonus ...
191
the special bonus of

pollution taxes is
that they generate
revenue ...
Cap-and-trade can
also generate
revenue ...
...if you use an
auction to
sell the permits!
...and we can use this revenue to

lower existing taxes.
Lower taxes on
working!
Lower taxes on
saving!
Why tax goods

when we can
tax bads?
Lower taxes on
investing!
The way economists see the world,

taxes and pollution are two unfortunate realities
that go great together!
in this case, two

wrongs really
do make a right!
192
isnt the world

heavenly?
N.Gregory Mankiw, Professor of Economics, Harvard University, and author of Principles of Economics
Googles chief economist, Hal Varian, once wrote, You

dont need a brand-new economics. You just need to see
the really cool stuff, the material they didnt get to
when you studied economics. The Cartoon Introduction
to Economics is all about integrating the really cool
stuffsuch as auction theory, adverse selection, and the
Prisoners Dilemmainto the funniest and most
digestible overview of microeconomics youll ever read.
Hilarity and economics are not often found together, but this book has a lot of both.
It also does a great job of explaining important economic concepts simply, accurately,
and entertaininglyquite a feat. Eric Maskin, Nobel Laureate in Economics
Bauman and Klein present solid basic economics in a brilliant cartoon wrapper.The
authors successfully shine a happy light on the dismal science.
Hugo Sonnenschein, Distinguished Service Professor and President Emeritus, University of Chicago
This is a seriously funny book! Klein and Bauman offer an enlightening and entertaining
look at why our day-to-day choices matter and how they all combine.Students will find
this a great addition to their textbooks, and critics of the discipline will learn what
economics is really about. Diane Coyle, author of The Soulful Science
Had Art Spiegelman and John Maynard Keynes collaborated on a comic
book on economics, they could only have dreamed of coming up with
something this good. Jonathan A.Shayne, a.k.a.Merle Hazard,
country singer and founder of Shayne & Co., LLC
A freelance cartoonist, illustrator, and animator,

Grady Klein is the creator of the Lost Colony
series of graphic novels.
$17.95
BUSINESS / GRAPHIC NOVELS
ISBN: 978-0-8090-9481-3
5 1 7 9 5
>
Cover art and design by Grady Klein

Photograph of Grady Klein Anne Caswell Klein
Photograph of Yoram Bauman Andrea M.Lee
Hill and Wang
The
cartoon
introduction to
economics
volume one: microeconomics
klein and bauman
An environmental economist at the University of

Washington (and a part-time teacher at Seattles
Lakeside High School), Yoram Bauman also
performs around the world as the worlds first
and only stand-up economist.
The cartoon introduction to economics

volume one: Microeconomics
Learning economics should be fun.

Klein and Bauman make sure that it is.
A division of Farrar, Straus and Giroux

www.fsgbooks.com
9
7 80809
09 4 8 1 3
www.cartooneconomics.com
novel
graphics
By Grady Klein and
Yoram Bauman, Ph.D.
hill
and
wang
the Worlds first and only Stand-up Economist

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N.

Googles chief economist, Hal Varian, once wrote, You

A freelance cartoonist, illustrator, and animator,

Cover art and design by Grady Klein

Hill and Wang

klein and bauman

An environmental economist at the University of

The cartoon introduction to economics

Learning economics should be fun.

A division of Farrar, Straus and Giroux

By Grady Klein and

Yoram Bauman, Ph.D.

the Worlds first and only Stand-up Economist

Decision Trees, page 15

From One to Some, page 53

Cake Cutting, page 67

Pareto Efficiency, page 79

Simultaneous-Move Games, page 89

Auctions, page 103

From Some to Many, page 117

Supply and Demand, page 129

Taxes, page 143

Margins, page 155

Elasticity, page 169

The Big Picture, page 181

Conclusion, page 193

There are powerful

The economic worldview is strongly influenced by one simple idea:

competitive markets are great!

...all small relative to

...will trade with

...and the result will

of course, the world we live in is not perfect...

here are a few

Rule #1: understand the markets limitations.

...you can have competitive markets that lead to outcomes that

But here too economists see the world differently.

when addressing inequality, economists

Rule #2: Protect competition.

markets need referees ...

...because companies have an incentive to fix prices or form cartels or

Its not illegal to

And in cases where competition is limited or impossible,

Rule #3: Give the market second chances.

Sometimes competitive markets create big messes, like pollution.

Economists think of pollution as an external cost,

...that is bad for

if i dont have to bear the

Wow, now thats

One way to make polluting expensive is to impose a

a properly designed pollution tax can close the gap between

...which means well

an alternative to a pollution tax is

...and you cant

...so they can

cap-and-trade sounds very different from a Pollution tax,

the special bonus of

...and we can use this revenue to

Why tax goods