Modern economics is a way of thinking that provides important insights into human behaviour and how the world works. The emphasis in Microeconomics 3 is on deepening students' understanding of the basic principles of microeconomics and learning how to use these principles to analyse real world problems and policy issues. Economic analysis provides a powerful tool for analysing public policy from both a positive (i.e. predictive) and normative (i.e. evaluative) perspective and focuses attention on how policies can be improved.

In the first part of the course we will set out how markets work and interrelate, using general equilibrium models to illustrate the fundamental theorems of welfare economics. We look at the distributional properties of a free-market economy and analyse the rationale for, and effects of, government redistribution of income. We review methods for thinking about the effects of government policies as well as the implications of the theory of the second best.

The role of the practicing (micro) economist in policy work is typically to deal with cases where markets have failed.  The second part of the course analyses certain cases of market failures (externalities, natural monopolies and information failures) and identifies and compares the economic policy options available.  But practical difficulties often make the textbook application of economic policies difficult.  Given this, the course looks at practical issues in policy work and how these may affect economic policy decisions.  The role and practice of cost benefit analysis is then discussed as a way to decide on the efficacy of regulation in the face of these difficulties.  This topic also covers ways of valuing non-market goods like the environment, time and health.