2.4 Behavioural Economics And Economic Policy

Question 1

What is meant by Behavioural economics?

Answer 1

• Consumer behaviour can influence the policies that governments employ.
• These policies might be different to traditional policies, and the two types of policy could work with each other.
• Policies developed from the theories of behavioural economics could be more effective for dealing with economic issues.

Question 2

What is choice architecture?

Answer 2

• refers to the way choices are presented to consumers.
• the different designs affect the choice consumers make.
• Well-designed choice architectures can help consumers avoid making irrational decisions and poor choices.
  -This could improve consumer welfare.
• For example, a consumer might be offered fewer choices, to avoid the time cost and consideration it takes to evaluate an extra choice.
• An example of choice architecture is organ donation.

Question 3

What is framing?

Answer 3

• the way by which consumers are influenced by the context of how a choice is presented.
• the context made includes word choices and it affects the choice consumers make.
  -For example, if consumers are told the monthly payment for a good or service, rather than the aggregate yearly payment, they are more likely to purchase the good or service, since it seems more affordable.

Question 4

What are nudges?

Answer 4

• They aim to change the behaviour of consumers without taking away their
  freedom of choice.
• It comes under the category of choice architecture.
• For example, rather than banning something like junk food, replacing it with healthier food is a nudge.
• This still allows consumers to make a free choice, but it alters their behaviour
  to choose the healthier option.

Question 5

What are the strengths and limitations of nudges?

Answer 5

• It is sometimes argued that nudges are manipulative and consumers do not get a
  free choice with them.
• However, due to imperfect information that exists between consumers and firms, nudges can help prevent consumers making irrational or poor choices, so their welfare is maximised.

Question 6

What is a default choice?

Answer 6

• is when a consumer is automatically enrolled into a system, such as a pension scheme.
• Consumers are more likely to participate when they are automatically enrolled.
• It is the choice the consumer makes if they take no action

Question 7

What is a restricted choice?

Answer 7

• is akin to the example of junk food and healthier food.
• The choice of the consumer is restricted, but it is still there.

Question 8

What is a mandated choice?

Answer 8

• is when consumers are required to state whether they wish to participate in an action.
• For example, in the UK everyone who applies or renews their driving licence is asked if they wish to sign up for organ donation.