5: Collective Action Problems and Institutions

Question 1

What are models?

Answer 1

Abstractions (simplifications) that help us to understand and interpret reality. They also help us in predicting future outcomes

Question 2

What is a theory

Answer 2

A system of ideas intended to explain phenomena (real world things) based on a shared body of principles

Question 3

What is an ethical philosophy

Answer 3

An effort to define how society should function in terms of what is accepted as right or wrong behaviour

Question 4

What is utilitarianism

Answer 4

Ethical philosophy that arose in the 18th century

View that the morally right action is the action that produces the greatest aggregate level of happiness and well being for affected individuals. Add up total benefits and costs and do the thing that results in the greatest amount of benefit for society

Question 5

What is Homo Economicus

Answer 5

Self interested individual
Does a perfect cost – benefit analysis on every decision (production/consumption) based upon their own preferences

Question 6

Slides 10-22

Answer 6

Cow collective action example

Question 7

What are collective action problems? Aka

Answer 7

Aka social dilemmas
Situations in which the rational self-interested behaviour of individual decision makers leads to suboptimal outcomes in terms of total utility (total happiness/well being)

Question 8

What is the Tragedy of the Commons?

Answer 8

Book published by Garret Hardin in 1968
Hardin noted that open access ‘common’ properties were doomed to tragedy because individuals had an incentive to over-exploit them

TOTC = Collective action problem

Question 9

What did Adam Smith assume in the Wealth of Nations? Arthur Pigou’s take?

Answer 9

Assumed that all ‘costs’ of production are included in the calculations of those making decisions

Arthur Pigou distinguished between private benefits and costs of production/consumption and external benefits and costs in ‘Wealth and Welfare’

Question 10

What are externalities?

Answer 10

External benefits and costs that result in exchanges between two people (impacts on others)
External costs are not considered by the key decision makers in the production/consumption process

Question 11

Example of a negative externality

Answer 11

Someone produces electricity, someone else buys it
Producer burns coal for electricity
People with respiratory illnesses are harmed by particles in the air from coal combustion (this person has no say in the exchange)

Question 12

examples of externalities when someone purchases coffee

Answer 12

Single use cups, lids, napkins = litter
Political impacts of coffee production, carbon emissions

Question 13

Two types of negative externalities

Answer 13

• Present day costs borne by 3rd parties
• Future costs borne by 3rd parties

Question 14

What are present day costs borne by 3rd parties

Answer 14

• Direct costs: health costs, aesthetic costs, physical harm
• Opportunity costs

Question 15

What are future costs borne by 3rd parties

Answer 15

• Opportunity costs relating to potential future consumption of non-renewables
• lost opportunities to make use of degraded renewable resources
• Health costs, aesthetic costs

Question 16

What is a positive externality

Answer 16

When benefits in a production-consumption relationship are experienced by a third party

Question 17

What is the prisoners dilemma

Answer 17

Longstanding game from game theory that demonstrates human behaviour under certain conditions
When prisoners cannot communicate with one another they are heavily incentivized to turn against each other resulting in a sub-optimal outcome
This is the world model that Hardin’s “Tragedy of the Commons” is based on

When they can communicate they have incentive to collaborate for the best possible outcome
Mimics real world collective action problems

Question 18

What are collective action institutions

Answer 18

In reality, people acting in their own self-interest act very differently when they can communicate and defend their own interests

They can institute a collective agreement as opposed to a competitive market based (antagonistic) one
= more optimal outcome

Question 19

Two definitions of institution? Think of them as

Answer 19

• Structures and mechanisms of social order and cooperation governing the behaviour of a set of individuals
• rules of the game in a society, or more formally, are the human devised constraints that shape human interaction

Think of them as instituted agreements

Question 20

Two components of an institution

Answer 20

1. The instruction: what is not allowed, allowed, and preferred/optimal
2. The incentive: some form of motivation (reward and punishment) that influences behaviour. Change the cost-benefit equation

Question 21

Slide 48

Answer 21

Littering institutions

Question 22

What are formal institutions

Answer 22

Rules, laws, contracts
Formal instructions and incentives devised by groups that influence the behaviour of group members
‘Punishments’ and ‘rewards’ include taxes, jail time, raises

Question 23

Traffic light formal institution example

Answer 23

Homoeconomocus supports these rules; society is much more efficient

If you break the rule, you could get a fine or get into a collision for which you would be liable

Question 24

What are informal institutions? Include…

Answer 24

Norms
Informal instructions and incentives devised by groups that influence the behaviour of group members
include social punishments (awkwardness, exclusion, shame) and social reward (respect, friendship)

Question 25

Who are ‘free riders’

Answer 25

People who did not do their work/seek the benefits without contributing

May be punished