5: Collective Action Problems and Institutions Flashcards
What are models?
Abstractions (simplifications) that help us to understand and interpret reality. They also help us in predicting future outcomes
What is a theory
A system of ideas intended to explain phenomena (real world things) based on a shared body of principles
What is an ethical philosophy
An effort to define how society should function in terms of what is accepted as right or wrong behaviour
What is utilitarianism
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
What is Homo Economicus
Self interested individual
Does a perfect cost – benefit analysis on every decision (production/consumption) based upon their own preferences
Slides 10-22
Cow collective action example
What are collective action problems? Aka
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)
What is the Tragedy of the Commons?
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
What did Adam Smith assume in the Wealth of Nations? Arthur Pigou’s take?
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’
What are externalities?
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
Example of a negative externality
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)
examples of externalities when someone purchases coffee
Single use cups, lids, napkins = litter
Political impacts of coffee production, carbon emissions
Two types of negative externalities
- Present day costs borne by 3rd parties
- Future costs borne by 3rd parties
What are present day costs borne by 3rd parties
- Direct costs: health costs, aesthetic costs, physical harm
- Opportunity costs
What are future costs borne by 3rd parties
- Opportunity costs relating to potential future consumption of non-renewables
- lost opportunities to make use of degraded renewable resources
- Health costs, aesthetic costs
What is a positive externality
When benefits in a production-consumption relationship are experienced by a third party
What is the prisoners dilemma
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
What are collective action institutions
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
Two definitions of institution? Think of them as
- 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
Two components of an institution
- The instruction: what is not allowed, allowed, and preferred/optimal
- The incentive: some form of motivation (reward and punishment) that influences behaviour. Change the cost-benefit equation
Slide 48
Littering institutions
What are formal institutions
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
Traffic light formal institution example
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
What are informal institutions? Include…
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)
Who are ‘free riders’
People who did not do their work/seek the benefits without contributing
May be punished
