EC2A5 Flashcards

Question

Optimal Compensation Graphically

Answer 1

Start with the same diagram we used for our income and substitution effect analysis. The consumer starts at A and the price of good 1 increases * If we don’t compensate the consumer they perceive the blue budget line and will get lower utility, we don’t want that! * If we compensate according to the person’s baseweighted price index (in red) we allow them to afford bundle A- but once they have the new income they will reoptimise at C * If we compensate according to the expenditure-based price index we remain on the original indifference curve (no change in utility, but a change in bundle)

Answer 2

Firms use inputs (like labor, capital, energy) to produce outputs (goods/services). They aim to maximize profits, defined as profits = revenues - costs. Firms make two key decisions: Revenue maximization (how much to sell/at what price). Cost minimization (how much labor and capital to employ).

Answer 3

Firms try to minimize production costs to maximize profits. The decision focuses on how much capital and labor to use, based on input prices and productivity.

Answer 4

In a fixed proportions production function, inputs like labor and capital must be used in specific ratios (e.g., 1 worker = 1 machine). Example: A building company needs one worker and one computer to run a concierge service. Production function example: 𝑦 = min{𝐾,𝐿}, where the firm can only produce output if capital (K) and labor (L) are used in fixed proportions.

Answer 5

In many industries, labor and capital are somewhat substitutable (e.g., in manufacturing). A Cobb-Douglas production function, such as 𝑓(𝐾,𝐿) = (𝐾^𝛼)(𝐿^𝛽) , allows for flexibility in choosing different combinations of labor and capital. Firms can adjust input levels based on relative costs.

Answer 6

An isocost line represents all combinations of labor and capital a firm can purchase for the same total cost. Firms aim to find the lowest isocost line that allows them to produce the desired output. The firm’s goal is to produce at the lowest possible cost while maintaining a certain level of output.

Answer 7

MRTS measures the rate at which a firm can substitute labor for capital (or vice versa) while keeping output constant. It is the slope of the production function and is set equal to the input price ratio: 𝑀𝑅𝑇𝑆 = (∂𝑓/∂𝐾) ÷ (∂𝑓/∂𝐿) = 𝑟/𝑤 Where 𝑟 is the cost of capital and 𝑤 is the wage rate for labor.

Answer 8

If the wage rate (w) decreases, labor becomes cheaper relative to capital, and firms will demand more labor and less capital. If the cost of capital (r) decreases, capital becomes cheaper relative to labor, and firms will demand more capital and less labor.

Answer 9

Changes in input prices, like an increase in the minimum wage or the introduction of cheaper technology, have significant consequences for employment and capital usage. Policymakers can set limits (e.g., minimum wage laws) or allow market forces to determine wages and technology adoption, but these choices are not neutral and affect firm behavior and labor markets.

Answer 10

To determine the impacts of policies (e.g., who benefits or changes behavior from policy X) by gathering data that helps to link policy actions to outcomes.

Answer 11

To understand why RCTs are called the “gold standard” for finding out if a policy causes a specific effect. To explore the challenges and limitations of setting up RCTs effectively.

Answer 12

Economics questions: Do nudges help people save more? Does having more police reduce crime? Does climate change harm coastal communities? Do minimum wages help workers? Non-Economics questions: What’s the best place for lunch? Should we legalize soft drugs? Should I be an investment banker? Should I open a beach bar?

Answer 13

Just because two things happen together doesn’t mean one causes the other. For example, margarine consumption and divorce rates might go up or down together, but that doesn’t mean one affects the other!

Answer 14

To see if a policy directly causes changes in outcomes we care about, like whether a speed limit reduces car accidents or if a drug helps cancer patients live longer. RCTs help test if the policy itself leads to these effects.

Answer 15

The counterfactual is what would have happened if the policy or treatment hadn’t been applied. We can’t directly see it, but RCTs try to get as close as possible by comparing a treated group to a control group.

Answer 16

In an RCT, people are randomly divided into a treatment group (receives the policy) and a control group (doesn’t). Afterward, outcomes are compared between the two groups. RCTs are the gold standard because randomization makes it more likely that any difference in outcomes is due to the policy itself.

Answer 17

Select 1,000 people who have been unemployed for over a year. Randomly assign half to take the training program (treatment) and half not to (control). After a few months, check if the training group finds jobs faster than the control group. If they do, we might say the training caused this effect.

Answer 18

Randomly assigning people helps ensure that the treatment and control groups are similar in things like age, education, and gender. This way, any difference in outcomes between the groups is more likely due to the policy, not other factors.

Answer 19

These are tests to make sure that the treatment and control groups are similar in important ways before the treatment starts (ex ante) or after the experiment is complete (ex post). If the groups are balanced, the results are more reliable.

Answer 20

RCTs can be expensive, may not be ethical or practical for every question, and may not always represent real-world situations. It’s hard to know if the results would be the same outside the experiment.

Answer 21

The treatment effect is the causal impact of receiving training, measured as the difference in outcomes (e.g., finding a job) between the treatment group (those who received training) and the control group (those who didn’t).

Answer 22

The individual treatment effect is the difference in outcomes if a person were treated vs. not treated, represented as 𝛿𝑖 = 𝑌1𝑖 − 𝑌0𝑖 . However, we cannot observe both outcomes for the same person, so we can’t directly measure it.

Answer 23

ATT measures the impact of the treatment on those who actually receive it. It’s calculated as 𝐸(𝛿 ∣ 𝐷=1) = 𝐸(𝑌1 ∣ 𝐷=1) − 𝐸(𝑌0 ∣ 𝐷=1) It’s estimable in experiments.

Answer 24

ATU estimates the treatment’s impact if it were given to those who weren’t treated, written as 𝐸(𝛿 ∣ 𝐷=0) = 𝐸(𝑌1 ∣ 𝐷=0) − 𝐸(𝑌0 ∣ 𝐷=0) This is typically unknown and harder to estimate directly.

Answer 25

ATE is the average effect of treatment across all individuals, calculated as 𝐸(𝛿𝑖) = 𝐸(𝑌1𝑖) − 𝐸(𝑌0𝑖) In an RCT, we can estimate it by comparing average outcomes between treatment and control groups.

Answer 26

We can’t observe the counterfactual (what would have happened without treatment) because we can’t go back in time. Instead, we use the ATE to approximate this by averaging the outcomes of treated and untreated groups.

Answer 27

A simple mean comparison may introduce biases, such as Selection Bias (SEL) and Heterogeneous Treatment Effects (HTE), which can distort the estimate. With proper randomization, ATE can avoid these biases, making the estimate more accurate.

Answer 28

Protocol Failures - Participants might not stick to their assigned groups, seeking the treatment on their own. Attrition - Some participants drop out, potentially unbalancing groups. Experimental Effects - Participants change behavior just because they know they’re in an experiment. External Validity - Results may not apply outside the experiment’s setting or to different populations.

Answer 29

If people drop out randomly, it’s not a big issue, but if specific groups drop out (e.g., those who find jobs leave a job-training study), it can create sample selection bias, making it harder to compare treatment and control groups.

Answer 30

Participants may alter behavior because they know they’re part of a study, such as becoming more hopeful in a medical trial. This is why many studies use placebos or “double-blind” setups to limit this effect.

Answer 31

External validity is about how well results apply outside the experimental context. Effects of a policy in one setting (e.g., a study in Kenya) may not hold elsewhere due to different environments, making it hard to generalize findings.

Answer 32

Not always. Failures in following protocol, attrition, and other biases can impact results. Plus, RCTs don’t fully capture real-world complexities, and effects seen in controlled settings may differ when scaled up or applied in other contexts.

Answer 33

Some RCTs may seem unethical if researchers from wealthier backgrounds test policies on lower-income groups or communities. This has raised questions about fairness, representation, and whether such studies would be allowed in high-income countries.

Answer 34

Russell’s chicken problem shows that trends we observe might not hold up over time. The chicken assumes the farmer will always feed it—until it’s slaughtered. This warns us that extrapolating results too far can lead to unexpected failures, as seen during the pandemic.

Answer 35

Definition: Game theory is the study of strategic interactions among players (e.g., firms, consumers), where each player’s payoff depends on their actions and the actions of others. Components of a Game: Players: Individuals or entities making decisions. Strategies and Information: Comprehensive plans and information available to each player. Payoffs: The rewards (e.g., profits, utility) that players receive based on the chosen strategies. Types of Games: Static Games: All players choose their actions simultaneously. Dynamic Games: Players make decisions in sequence, often with one player observing another’s action first.

Answer 36

Definition: A best response is a strategy that yields the highest payoff for a player, given the strategies chosen by other players. Application: In a game, each player analyzes the strategies of others and determines the best response to maximize their own payoff.

Answer 37

Definition: A dominant strategy is one that is optimal for a player, regardless of the strategies chosen by others. Example: In the case of two tech companies (e.g., Apple and Samsung), Apple’s strategy of launching a product in the fall might always yield a high payoff, making it a dominant strategy. Outcome: If both players have dominant strategies, they will choose them, and the game outcome will reflect the intersection of these dominant strategies.

Answer 38

Concept: A Nash Equilibrium is a set of strategies where each player is choosing their best response to the other players’ strategies, resulting in stability (no player has an incentive to deviate). Characteristics: At NE, players respond optimally to each other’s strategies, but NE does not guarantee the best collective payoff. Types: Pure Strategy NE: Each player chooses one strategy with certainty. Mixed Strategy NE (MNE): Players randomize over strategies, leading to an equilibrium where expected payoffs are equal across chosen strategies. Example: In a penalty shootout, if both the goalie and striker randomize actions (left or right) in specific probabilities, it can create an MNE where neither has a strong incentive to deviate. -> suboptimal strategy!

Answer 39

Definition: An MNE allows players to randomize between strategies with certain probabilities, making them indifferent to the choice due to equal expected payoffs. Application: In sports (e.g., a penalty shootout), the striker and goalie randomize actions to keep the opponent uncertain.

Answer 40

Context: IO applies game theory to analyze firms’ interactions, particularly in oligopolies, where each firm’s decisions (e.g., pricing, output) affect competitors. Contrasts: - Perfect Competition: Many firms with identical products and cost structures. - Monopoly: A single firm with no competition. - Oligopoly: Few firms with interdependent decisions, akin to a strategic game.

Answer 41

- Firms set prices - Firms produce identical goods and have the same cost structures. Firms set prices simultaneously which leads to the NE to set P=MC. Which leads to zero economic profits, mirroring perfect competition - The efficient outcome results in no deadweight loss because all consumers value the good more than its marginal cost and are able to purchase it.

Answer 42

Firms choose quantities rather than prices - the NE is where both firms are choosing quantities such that no firm has an incentive to deviate. - In CC, firms typically produce less than perfect competition but more than a monopoly, which allows them to earn positive profits while the market price is higher than the MC.

Answer 43

incorporate the element of TIME, where players make decisions in a sequence, allowing later players to observe earlier actions before making their own choices. - This contrasts which simultaneous hames (where players move without knowing the actions of others) by adding a temporal element.

Answer 44

- A refinement of the NE applied to dynamic games. It ensures that the strategy chosen is a NE in every subgame, not just every game. The solution method is a backward induction: 1. Start by analysing the last decision in the game (i.e. what the incumbent would do after seeing the entrant's action) 2. Use this info to determine the best action for the entrant, who anticipates the incumbent's response.

Answer 45

Actions are the choices available at a given point (e.g. expand or keep the product line entrant, fight/not fight for the incumbent)

Answer 46

Strategies represent a full plan of action that includes what a player will do at every possible decision point (i.e. the incumbent's strategy is whether to fight or not fight, depending on what the entrant does)

Answer 47

Nash Equilibrium (NE): - While NE is stable, multiple equilibria can exist, making real-world predictions difficult. - NE assumes fully rational behavior, which may not hold in real life (e.g., tax compliance, cooperation). Alternatives: - Level-k Thinking: Incorporates bounded rationality and has shown more realistic predictions in experiments. - Behavioral Models: Incorporate psychological factors like overconfidence or limited foresight, which can diverge from NE predictions.

Answer 48

Concept: An extension of Cournot, but with sequential moves. Structure: The first-mover (leader) sets output, while the follower observes this and then sets their own output. Outcome: The leader anticipates the follower’s response and gains a strategic advantage, typically securing higher profits than in simultaneous-move Cournot competition.

Answer 49

Concept: A behavioral model that provides a realistic alternative to Nash Equilibrium by accounting for different “levels” of rationality. Levels: Level-0: Assumes players choose actions randomly. Level-1: Believes opponents are Level-0, hence responds optimally against random behavior. Level-2: Assumes opponents are Level-1 and best responds to their predicted strategy. Higher levels continue this iterative reasoning process. Implications: Players typically do not reach the fully rational (Level-infinity) equilibrium in real life. Instead, they base decisions on the assumed reasoning level of others, creating more predictive outcomes than Nash in certain games, such as guessing games or auctions.

Answer 50

Definition: Choices under uncertainty are situations where decision-makers do not have full information on the outcomes. This is common in real-life decisions like investing in the stock market or betting, where the outcome is unknown or partially known. Types of Uncertainty: - Uncertain Events: Outcomes are unknown, and it’s impossible to assign probabilities to them. Example: an alien invasion—there is no historical data to calculate probabilities. - Risky Events: Outcomes are uncertain, but probabilities can be assigned. Example: flipping a coin—each outcome has a clear 50% probability.

Answer 51

1. Utility of Outcomes In expected utility theory, each outcome has a certain "utility" (a measure of satisfaction or preference) for an individual. Utility values reflect how much a person values a particular outcome. Unlike the actual monetary value, utility is subjective—two people might value the same outcome differently, depending on their preferences, wealth, and risk tolerance. 2. Decision Making under Uncertainty Expected utility maximization is often applied to situations where the outcomes of choices are uncertain, like lotteries, investments, or even career choices. When making decisions under uncertainty, the exact outcome of a choice is unknown, but we can assign probabilities to each possible outcome. For example: Imagine a simple lottery where you have a 50% chance of winning $100 and a 50% chance of winning nothing. Here, the probabilities (0.5 for each outcome) and the potential winnings are known. 3. The Expected Utility Calculation When people maximize expected utility, they don’t look at the outcomes directly. Instead, they calculate the "expected utility" of each choice by: Assigning a utility to each possible outcome. Weighting each utility by its probability. Summing up these weighted utilities to find the expected utility of the choice. Example: Suppose you have a lottery where: With a probability of 0.5, you win $100, which has a utility of u(100). With a probability of 0.5, you win nothing, which has a utility of EU=0.5×u(100)+0.5×u(0) The outcome with the highest expected utility is usually chosen because it is assumed to provide the highest satisfaction or value based on the person’s preferences. 4. Expected Utility vs. Expected Value Expected utility maximization differs from expected value maximization because it accounts for utility, not just monetary amounts. For instance, a risk-averse person might reject a fair gamble (e.g., 50-50 chance to win or lose $10), even if it has an expected value of zero, because their utility function makes the loss feel worse than the gain. Key takeaway: Expected utility maximization provides a model for how individuals make choices when they are uncertain about the outcomes, weighting potential utilities by their probabilities and selecting the option with the highest expected utility.

Answer 52

Not everyone views uncertain outcomes the same way—some people are risk-averse, risk-neutral, or risk-loving. A person's utility function reflects their risk preference, impacting their decision under uncertainty: - Risk-averse individuals: They have a concave utility function (e.g., u(w)= sq root. (w) meaning they prefer certain, smaller gains over larger, uncertain ones. They maximize expected utility by avoiding risks unless the potential gains are high enough. - Risk-neutral individuals: They have a linear utility function (e.g., u(w)=w), meaning they only care about maximizing the expected monetary value, regardless of risk. - Risk-loving individuals: They have a convex utility function (e.g., u(w)=w^2), meaning they prefer risky prospects with potential for larger gains, even if the expected return is the same.

Answer 53

Utility Function: Increasing and concave, e.g., U(w)=ln(w) or U(w)=w ^ 0.5 . Behavior: A risk-averse individual prefers a certain outcome over a lottery with the same expected value due to the diminishing marginal utility of wealth. Expected Utility: For a lottery to be accepted, the utility must offer an expected value higher than the certainty equivalent.

Answer 54

Utility Function: Linear, such as U(w)=w, meaning the agent is indifferent to risk. Behavior: Accepts lotteries where the expected monetary value is non-negative

Answer 55

Utility Function: Increasing and convex, e.g., U(w)=w ^ 2 Behavior: A risk-loving agent is inclined to participate in lotteries even when they don't break even in expectation.

Answer 56

The certainty equivalent (CE) is the guaranteed amount of money that an individual would consider equally desirable as a given risky or uncertain gamble. Essentially, it’s the amount of money that makes a person indifferent between taking a certain amount and participating in a gamble with uncertain outcomes. The certainty equivalent is helpful in understanding how much risk a person is willing to accept. It differs based on their risk attitude: Risk-Averse Individuals: For these individuals, the certainty equivalent is typically less than the expected value of the gamble. They would accept a smaller certain amount rather than face uncertainty, reflecting their aversion to risk. For example, a risk-averse person might take a guaranteed $40 over a gamble with a 50% chance of winning $100 (expected value = $50). Risk-Neutral Individuals: These individuals are indifferent between a certain outcome and a gamble with the same expected value. Their certainty equivalent equals the expected value of the gamble. A risk-neutral person would view a guaranteed $50 and a 50% chance of winning $100 as equivalent. Risk-Loving Individuals: For risk-loving people, the certainty equivalent may be higher than the expected value of the gamble. They might require a larger amount in a certain outcome to feel as excited as they would about the gamble. So, a risk-loving person might need a guaranteed $60 to be indifferent to a 50% chance of winning $100.

Answer 57

Jensen’s Inequality: This states that for a concave function U, such as a risk-averse utility function, the expected utility of the lottery is less than the utility of the expected outcome: EU(l)

Answer 58

Key Innovations: Prospect theory, developed by Tversky and Kahneman, challenges the expected utility theory by introducing: Reference Dependence: Choices are evaluated relative to a reference point (not absolute wealth). Gains and losses are judged from this reference rather than the absolute level of wealth. Loss Aversion: Losses are perceived as more impactful than equivalent gains. For example, losing £10 feels worse than gaining £10 feels good. Diminishing Sensitivity: The value function is concave for gains and convex for losses, meaning the impact of gains and losses diminishes as they increase in magnitude.

Answer 59

Practical Implications: Understanding risk attitudes has major applications: Insurance: Risk-averse individuals are more likely to buy insurance, as they prefer to avoid uncertainty even at a cost. Insurance markets exist largely due to risk aversion among consumers. Financial Decisions: Risk preferences explain why people may reject or accept investments with the same expected monetary outcomes but different risk profiles. Behavioral Finance: Prospect theory helps explain phenomena like why individuals hold onto losing stocks or reject objectively favorable bets.

Answer 60

The way choices are presented affects decision-making. People are generally risk-averse when outcomes are framed positively (e.g., lives saved) and risk-seeking when framed negatively (e.g., lives lost).

Answer 61

Commonly observed in decision-making, overconfidence can lead to underestimating risks and overestimating one's ability to influence outcomes, often resulting in biased decisions in areas such as gambling or investments.

Answer 62

Risk Tolerance: The amount of money we are willing to risk depends heavily on the amount of money we already have Bernoulli's Insight: As wealth increases, the additional utility (satisfaction) from extra money decreases. e.g. giving £10 to a poor person increases their utility more than giving £10 to a billionaire (Diminishing marginal utility of wealth)

Answer 63

People tend to value things they already own more than the things they don't own, even if the items are objectively the same. e.g. say you were gifted a coffee mug and someone offers to buy it from you, you might say "sure but I'll sell it for $10' But, if you didn't already own the mug and were asked how much you'd be willing to pay for it, you might think "maybe $3 is a fair price!" - WTA: Willingness to accept; how much money someone is willing to give up something they own - WTP: Willingness to pay; how much money someone is willing to pay to acquire something they don't own. The Endowment effect explains why WTA>WTP

Answer 64

What is the Value Function? In prospect theory, the value function 𝑉 ( 𝑥 ) V(x) describes how people perceive gains and losses, not just the final outcomes. It differs from expected utility theory by accounting for people's tendency to react differently to potential gains and losses. Key Characteristics: Reference Point: Gains and losses are assessed relative to a reference point (often current wealth or status quo). Loss Aversion: People feel losses more intensely than equivalent gains. For example, a loss of $10 feels worse than a gain of $10 feels good. S-Shaped Curve: The function is concave for gains and convex for losses, reflecting diminishing sensitivity—large gains or losses impact less than initial ones. Example Function: V(x−r)=x−r. For losses (x

Answer 65

Scenario: Johnny is a risk-averse expected-utility maximizer who would not accept a fair 50-50 gamble to win $11 and lose $10, regardless of his wealth. Paradox: Johnny’s extreme risk aversion means he would also reject a huge potential gain in a 50-50 gamble to win $3.5 billion or lose $100. This rejection occurs because his utility function flattens out rapidly, showing high concavity—a small gamble risk implies an unwillingness to accept even massive gains if there’s any chance of loss. Why It’s Absurd: Diminishing Marginal Utility of Wealth: In Johnny’s utility function u(w), the marginal utility of additional wealth drops quickly as wealth increases. This implies he’d avoid even tiny risks, leading to highly conservative choices and rejecting even life-changing gains if there’s any chance of losing. Such behavior suggests that risk aversion over small stakes could lead to unreasonable decisions when stakes are very high. Takeaway: Extreme risk aversion in small stakes leads to irrationality at high stakes. If people are risk-averse to every small gamble, they may paradoxically avoid high-stake opportunities that offer significant positive expected values, illustrating the limits of conventional risk aversion in expected-utility theory.

Answer 66

- Definition: Intertemporal decisions are choices impacting both current and future utility, involving trade-offs between immediate and delayed benefits. - Examples: Decisions like studying, saving money, or investing have long-term repercussions. - Principle: Future money or utility is generally less valuable than present money or utility due to the preference for immediate access.

Answer 67

Concept: Money today is worth more than money tomorrow due to potential interest earnings and inflation. Example Calculation: £100 invested today at 10% interest yields £110 after one year. Formula: The future value FV=PV(1+r), where r is the interest rate and PV is the present value.

Answer 68

Indifference Point: A person is indifferent between receiving £X today or £Y in the future if the PV of both options is equal. Example: If receiving £1,000 in one year, the present value today (assuming 10% rate) would be £909 (1000÷1.1). Application: Used in personal and business finance to assess the value of projects or investments. Decision Rule: If PV > 0, the bond is a good investment; if PV < 0, it isn’t worth buying. Multiple Choices: Compare PVs of different investments or activities to determine the best option.

Answer 69

Assumptions Include: - Uniform Rate for Saving and Borrowing: Assumes interest rates for savings equal borrowing rates. - No Uncertainty: Assumes all future payments or utility amounts are known. - Perfect Repayment Mechanism: Implies no default risk; individuals and firms always repay as agreed. - Limitations: These assumptions don’t always reflect reality but make the model flexible for analyzing financial decisions.

Answer 70

- Time Consistent Preferences: This model assumes that a person’s choices remain consistent over time. - Application: Helps analyze decisions like savings or portfolio choices, which are expected to be stable over long periods (e.g., holding the same investments over years). - Why It’s Useful: Although idealized, this approach simplifies analyzing complex financial behaviors over time.

Answer 71

Concept: Thaler’s experiment reveals high short-term impatience. Details: Participants were asked how much they'd need to delay a $15 reward by a month; median answer implied a high monthly discount rate, leading to extreme annual rates, indicating people heavily discount short-term gains but less so long-term. Implication: People often display "hyperbolic discounting," meaning they're more impatient over short periods than longer ones.

Answer 72

Concept: People discount time inconsistently, showing different preferences based on how far in the future outcomes are. Details: When offered $15 now versus $100 in 10 years, participants required a very high interest rate to wait, which conflicts with their short-term discount rates. Implication: Traditional discounting models struggle to explain this; people’s preferences shift over time, demonstrating "present bias."

Answer 73

Concept: Present-biased individuals postpone unpleasant tasks even when it’s irrational. Details: Given a choice to do laundry over three days, a rational person would choose the least costly day, but a present-biased individual delays, preferring immediate comfort despite higher future costs. Result: The model illustrates how immediate rewards (not doing laundry today) overshadow future disutility, leading to procrastination.

Answer 74

Concept: The βδ model accounts for short- and long-term discount rates, addressing the inconsistency in time preference. Details: In this model: δ represents long-term patience (discount factor over extended periods). β reflects short-term impatience, discounting immediate future rewards more heavily. Implication: This model helps explain why people may save for long-term goals yet still splurge in the short run.

Answer 75

Concept: Nudges subtly guide decision-making without removing options or adding restrictions. Example: SEED accounts in the Philippines offered a "commitment savings device" that allowed savers to lock funds for specific goals, leading to significant savings increases. Outcome: Nudges like SEED work by countering present bias, helping individuals reach long-term goals despite short-term temptations.

Answer 76

Concept: While nudges help with individual behaviors, they may not scale well. Evidence: Studies, such as DellaVigna & Linos (2022), found real-world nudges often yield smaller effects than reported in academic trials. Takeaway: Nudges are useful but should be part of a broader strategy, as results vary, especially when scaled across diverse populations. - Economists won't publish findings if the findings have no statistics. If the nudge had no outcome it is less likely to be published, leads to asymmetric information

Answer 77

Concept: Interest rate changes influence consumption choices differently for borrowers and lenders. Effects: When rates rise, borrowing becomes costlier, leading people to save more (consume less today). Rate drops benefit borrowers by making current consumption affordable, while they reduce lenders' future purchasing power. Application: Understanding these effects can help in designing policies that align with the financial needs of both groups.

Answer 78

Definition: An externality occurs when an action by one agent (person or firm) affects the utility or production of another agent, without this impact being directly accounted for in market transactions. Types of Externalities: - Positive Externality: Increases others' utility (e.g., vaccines improve public health). - Negative Externality: Decreases others' utility (e.g., pollution harms health). Example: - A firm polluting a river negatively impacts nearby residents’ quality of life. - Altruistic actions, like donating to charity, provide positive externalities by improving others' well-being.

Answer 79

When Person B’s consumption of a good increases Person A’s utility, even if Person A doesn’t consume it. Examples: Vaccines: Improve herd immunity, benefiting everyone. Deodorant/Perfume: Enhances the experience of those nearby. Wikipedia: A user updating an article improves knowledge for all.

Answer 80

When Person B’s consumption of a good decreases Person A’s utility. Examples: Cigarettes: Secondhand smoke negatively affects others. Loud Music: Neighbors are disturbed by noise. Air Travel: Planes flying over a city create noise pollution.

Answer 81

Occur when Person A’s utility is directly affected by Person B’s utility, regardless of the underlying reason. Examples: Positive Utility Externality: Friends feel happy when you succeed. Negative Utility Externality: Envy when someone achieves more than you. Key Insight: Utility externalities highlight how personal well-being can be interconnected with others' outcomes.

Answer 82

Richard Easterlin observed that while higher income correlates with higher happiness within a country, historical data shows no corresponding increase in happiness as median income grows. Explanation: Once basic needs are met, happiness is influenced more by relative income than absolute income. Utility externalities arise as people compare their wealth to others.

Answer 83

Cultural Differences: Japan: Emotional support from others is a strong predictor of happiness. US: Self-esteem is a stronger predictor of happiness than social support. Reporting Variations: Middle Eastern societies report polar extremes (e.g., very satisfied or dissatisfied). East/Southeast Asian societies report moderate satisfaction. Key Insight: Cultural, social, and religious factors shape the meaning and predictors of happiness.

Answer 84

Self-Reported Measures: Cultural and linguistic differences affect responses to happiness surveys. Examples of Surveys: Eurobarometer and OECD: Ask respondents to rate their life satisfaction. Results show Denmark often ranks highest, but interpretation varies. Challenges: People interpret scales differently, complicating cross-country comparisons.

Answer 85

Definition: Vignettes present fictional scenarios to normalize subjective judgments. Method: Participants rate the happiness of characters in standardized scenarios. Researchers adjust responses to control for differences in scale perception. Example: In a vignette, John is moderately satisfied despite health issues, allowing researchers to recalibrate participants' self-reports.

Answer 86

Definition: Occur when a firm’s production activities impact others not directly involved in the process. Examples: - Negative Production Externality: Noise from construction sites disturbs nearby residents. - Positive Production Externality: Military research on technology like the internet benefits society. Key Insight: Production externalities can drive economic policies like subsidies (for positive externalities) or taxes (for negative externalities).

Answer 87

1. Objective Proxies: Use measures like GDP, life expectancy, or health indicators instead of self-reports. 2. Standardization via Vignettes: Normalize subjective measures by comparing responses to controlled scenarios. Example: The Angelini et al. study adjusted subjective well-being data and found that Swedes ranked happiest, not Danes.

Answer 88

1. Basic Needs: Income and security significantly impact happiness until basic needs are met. 2. Relative Income: After basic needs, happiness is influenced by social comparisons. Cultural Values: - Individualist Cultures: Emphasize personal achievements and self-esteem. - Collectivist Cultures: Emphasize social harmony and emotional support. Example: Americans value self-esteem as a happiness driver, whereas Japanese emphasize social connections.

Answer 89

Utility externalities highlight how individuals' well-being is interconnected. Policy Implications: - Encourage positive externalities (e.g., subsidize vaccines). - Mitigate negative externalities (e.g., tax pollution). Example: Policies that reduce income inequality may enhance happiness for society as a whole.

Answer 90

Pareto Efficiency: An allocation where no one can be made better off without making someone else worse off. Impact of Externalities: - Externalities disrupt Pareto efficiency, leading to overproduction (negative) or underproduction (positive). - Government Intervention: Often needed to internalize externalities and restore efficiency.

Answer 91

Consumer Surplus (CS): Area under the demand curve P(Q) and above the price P. Producer Surplus (PS): Area above the supply curve (marginal cost MC) and below the price P. Social Welfare (SW): Sum of CS and PS. Deadweight Loss (DWL): Loss of social welfare due to externalities, calculated as: DWL = 1/2(Qc-Qe) x (MSC(Qc)-PC) where Qc is the competitive quantitity, Qe is the efficient quantity, and MSC is the marginal social cost.

Answer 92

1. Marginal Private Cost (MPC): Cost incurred by the producer for each additional unit. 2. External Marginal Cost (EMC): Cost imposed on others not borne by the producer. 3. Marginal Social Cost (MSC): Total cost to society: MSC=MPC+EMC. 4. Marginal Private Benefit (MPB): Benefit to the consumer for each additional unit. 5. Marginal Social Benefit (MSB): Total benefit to society: MSB=MPB+EMB.

Answer 93

- Market Outcome: Firms set MPB = MPC, producing Qc - Efficient Outcome: Requires MPB = MSC, producing Qe - Result: Over production (Qc>Qe) causes DWL Graphical Representation: MSC = MPC + EMC DWL is the triangle between Qc and Qe, under the MSC curve and above MPC.

Answer 94

- Market Outcome: Firms set MPB = MPC, producing Qc - Efficient Outcome: Requires MSB = MPC, producing Qe - Result: Under production (Qc>Qe) causes DWL Graphical Representation: MSB = MPB + EMB DWL is the triangle between Qc and Qe, under the MSB curve and above MPC.

Answer 95

Definition: If property rights are well-defined and transaction costs are negligible, parties will bargain to achieve an efficient outcome regardless of who holds the property rights. Examples: If firms hold pollution rights, individuals can pay them to reduce emissions. If individuals hold clean air rights, firms must pay for the right to pollute. Limitations: High transaction costs in large-scale externalities (e.g., multinational pollution). Information asymmetry about the efficient level of production. Income effects of assigning rights, particularly in deprived areas.

Answer 96

1. Pigouvian Tax: A per-unit tax equal to the EMC to internalize a negative externality. Optimal Tax = EMC at Qe 2. Pigouvian Subsidy: A per-unit subsidy equal to the EMB to encourage positive externalities. Optimal Subsidy = EMB at Qe Example: Carbon taxes internalize the environmental costs of emissions.

Answer 97

Definition: A hybrid solution where pollution permits are capped and firms can trade permits. Example: The EU Greenhouse Gas Emission Trading System (ETS). Benefits: Encourages emission reductions for profit. Ensures a cap on total emissions.

Answer 98

- Definition: A good that is non-rival (one person’s use doesn’t reduce availability to others) and non-excludable (no one can be prevented from using it). - Examples: National defense, public radio, fireworks. Challenges: - Under-Provision: Individuals understate their willingness to pay, leading to insufficient supply. - Efficient Provision: Occurs where Social Demand (sum of individual demand) = Marginal Cost (MC)

Answer 99

Rival Goods: Consumption reduces availability for others (e.g., food). Non-Rival Goods: Consumption doesn’t affect others’ use (e.g., radio). Excludable Goods: Access can be restricted (e.g., books). Non-Excludable Goods: Access cannot be restricted (e.g., clean air). Matrix of Goods: Excludable Non-Excludable Rival: Private Goods (e.g., food) Non-Rival: Club Goods (e.g., satellite TV)

Answer 100

Definition: A situation where individuals acting in their own self-interest deplete or spoil a shared resource, contrary to the common good. Example: Overfishing—while collectively everyone would benefit from reduced fishing, individual incentives drive overexploitation. Key Insight: Our actions often fail to account for externalities like biodiversity loss or pollution.

Answer 101

Importance: - Oceans cover 71% of Earth’s surface and generate $300 billion annually for Africa’s economy. - They are major carbon sinks, absorbing 25% of annual CO2 emissions. Challenges: - Overfishing, plastic waste, and climate change threaten ocean health. - Warming oceans disrupt ecosystems and affect livelihoods for 3 billion people.

Answer 102

Definition: Climate change results from greenhouse gas (GHG) emissions, a negative externality where the costs are borne by society, not the emitter. Economic Problem: - Missing market: No direct mechanism to account for the long-term costs of emissions. - Intergenerational impact: Today’s emissions harm future generations.

Answer 103

Definition: Carbon moves between reservoirs (e.g., atmosphere, oceans, biosphere) through exchanges called the carbon cycle. Impact: - Human activities like burning fossil fuels shift carbon into the atmosphere, increasing GHG levels and warming the planet.

Answer 104

- Externality: The costs of emissions are not reflected in market transactions. - Missing Market: Future generations cannot enforce their preferences against current emissions. - Coordination Failure: Lack of a global system to aggregate preferences and enforce actions leads to suboptimal outcomes.

Answer 105

Vulnerability Factors: Age, gender, income, geography, and pre-existing conditions. Exposure Pathways: 1. Extreme weather (e.g., hurricanes) causes displacement and infrastructure damage. 2. Heatwaves increase heat stress and cardiovascular risks. 3. Poor air and water quality lead to respiratory illnesses and dehydration. 4. Vector changes spread diseases like malaria and dengue. Economic Implication: Preventive measures are often cheaper than reactive responses.

Answer 106

Setup: - Two countries decide whether to reduce emissions. - Each country benefits from the other's reductions but faces a cost for their own. Outcome: - Nash Equilibrium: Both countries choose not to reduce emissions (NE = {don't, don't}). - Suboptimal Result: Individually rational decisions lead to a collectively worse outcome. Key Insight: Climate change is a global public goods problem, requiring coordination for optimal outcomes.

Answer 107

1. Voluntary Cooperation: - International agreements (e.g., Montreal Protocol) incentivize cooperation. - Social norms and activism promote individual actions. 2. Government Intervention: - Pigouvian taxes: Tax emissions to internalize external costs. - Subsidies for renewable energy and R&D. Challenge: Effective mechanisms require global coordination and enforcement.

Answer 108

- Definition: A tax equal to the external marginal cost (EMC) of a negative externality. - Purpose: Align private costs with social costs, leading to the efficient quantity of production (Qe). Formula t = EMC at Qe Example: Carbon taxes on emissions to account for environmental damage.

Answer 109

Definition: A system where pollution permits are capped and traded among firms. Mechanism: - Cap: Limits total emissions. - Trade: Incentivizes firms to reduce emissions and sell excess permits. Example: The EU Greenhouse Gas Emission Trading System. Benefit: Combines the certainty of a cap with the efficiency of market mechanisms.

Answer 110

1. Definition of Public Goods: - Non-Rival: One person’s use doesn’t reduce availability for others. - Non-Excludable: People cannot be prevented from using them. 2. Issue: - Individuals undervalue the societal benefit of public goods (e.g., clean air). - Leads to free-riding and insufficient provision. Example: Fireworks displays funded by voluntary contributions.

Answer 111

- Definition: Agreements where countries collaborate on environmental goals. Successes: - Montreal Protocol (CFCs): Effective due to immediate, clear benefits. Challenges: - Climate change is more complex, with delayed and unevenly distributed impacts. Key Insight: Voluntary cooperation is critical, but enforcement mechanisms are necessary for long-term success.

Answer 112

1. Demographic Factors: Age, gender, education. 2. Geographic Factors: Coastal areas, urban heat islands. 3. Socioeconomic Factors: Income, access to resources. 4. Health System Capacity: Preparedness and adaptability to climate-related health challenges. Key Insight: Resilient health systems mitigate the human and economic costs of climate crises.

Answer 113

Definition: A situation where individual users overexploit a shared resource, depleting or degrading it, contrary to the common good. Examples: - Overfishing: Individuals catch more fish, collectively depleting stocks. - Climate change: Excessive emissions harm future generations. Key Insight: Common resources are at risk when individual incentives conflict with collective well-being.

Answer 114

Definition: Agreements among countries to address environmental issues collaboratively. Challenges: 1. Determining desirable reduction targets. 2. Ensuring domestic incentives for compliance. 3. Establishing enforcement mechanisms and punishments for non-compliance. Example: The Paris Agreement aims to limit global warming, but enforcement and commitment vary by country.

Answer 115

Scott Barrett’s Framework: - Pull Factor: Countries must see benefits from cooperation. - Push Factor: Countries must perceive penalties for non-cooperation. Application: Incentive structures must align to make agreements successful, avoiding free-riding.

Answer 116

Proposed by: William Nordhaus. Definition: A voluntary group that derives mutual benefits from shared costs for producing public goods (e.g., emissions reduction). Mechanism: - Gains must be large enough to attract members. - Punishments (e.g., trade restrictions) deter non-members. Example: Trade agreements as incentives to join emissions-reduction clubs.

Answer 117

Definition: Stricter environmental regulations in some countries may incentivize polluting firms to relocate to less regulated countries. Effects: - Shifts pollution rather than reducing it. - Reduces GDP in regulated countries as firms outsource production. Key Insight: Effective global coordination is necessary to prevent shifting rather than solving environmental issues.

Answer 118

1. Reduce emissions by minimizing energy, water, and plastic use. 2. Adopt sustainable practices, such as eating less red meat and driving less. 3. Support a circular economy, where waste is reused in production. Key Insight: Individual actions complement broader systemic changes.

Answer 119

1. Subsidize R&D: Encourage innovation for lower emissions and higher efficiency. 2. Implement Carbon Taxes: Internalize the external costs of emissions. 3. Support Just Transition: Ensure equitable sharing of mitigation costs, especially for developing nations. Key Insight: Policy design requires understanding economic impacts and societal preferences.

Answer 120

Definition: The estimated monetary value of damages caused by emitting one additional ton of CO2. Purpose: Guides the optimal carbon tax to internalize climate externalities. Challenges: Requires assumptions about future emissions, economic impacts, and discount rates.

Answer 121

Definition: Discount rates reflect how future costs and benefits are valued today. Formula: ρ=δ+ηg(Ct), where is pure time preference, η is inequality aversion, and g(Ct) is the consumption growth rate. Key Debate: - Stern Review: Advocates for low discount rates (ρ=1.4%) to prioritize future generations. - Nordhaus: Suggests market-based rates (ρ=4.3%) to reflect observed preferences.

Answer 122

Definition: Ensuring that the costs of climate change mitigation are shared equitably across countries and communities. Focus Areas: - Inclusivity of all stakeholders. - Addressing socioeconomic disparities. - Supporting developing nations that face disproportionate impacts. Key Challenge: Balancing fairness with efficiency in policy implementation.

Answer 123

Barriers: - Fear of higher energy prices and job losses. - Perceptions of unfairness or lack of trust in the government. Enablers: - Transparent and equitable cost distribution. - Progressive taxation schemes. - A sense of responsibility for future generations. Key Insight: Policies must address not only economic but also psychological and social factors.

Answer 124

- Criticism: Without monitoring and enforcement, "protected" status may not prevent misuse. - Success Stories: Evidence shows that even poorly enforced areas can reduce degradation and promote biodiversity recovery. Key Insight: Combining policy with local engagement and monitoring increases effectiveness.

Answer 125

1. Extreme Events: Unpredictable catastrophes like ice sheet collapses. 2. Biodiversity Loss: Potential tipping points. 3. Technological Progress: Advances may mitigate impacts. 4. Socioeconomic Factors: Distributional fairness and just transition. Key Challenge: Incorporating these uncertainties into robust cost-benefit analyses.

Answer 126

Definition: Analytical tool used to evaluate the costs and benefits of interventions, often involving public expenditure. Purpose: - Compare the costs and benefits of policies or projects. - Determine if interventions are worth implementing. - Evaluate impacts before (ex-ante) or after (ex-post) implementation.

Answer 127

- Social CBA: Evaluates all costs and benefits to society, including equity impacts, non-market values, and shadow prices. - Private CBA: Focuses on individual costs and benefits, using market prices and private discount rates, without accounting for societal impacts. Example Questions: Should the World Cup be held in Qatar? Should public museums in London remain free?

Answer 128

Ex-Ante: Conducted before implementation to decide if a policy should be adopted. - Requires forecasting costs and benefits. - Limited by prediction accuracy. Ex-Post: Conducted after implementation to evaluate outcomes. - Provides insights for similar future projects. - Cannot reverse past actions

Answer 129

Definition: A policy is justified if those who benefit could compensate those who lose, creating a potential Pareto improvement. Focus: Maximizes the "size of the pie" before addressing distribution. Critique: No guarantee of actual compensation. Example: Policy 1 benefits only person A but increases overall utility. Policy 2 benefits everyone equally but adds less utility overall. CBA would favor Policy 1.

Answer 130

1. Identify policies and define the baseline (status quo). 2. List and quantify impacts on the affected population. 3. Predict impacts over the project's life. 4. Monetize impacts and calculate net present value (NPV). 5. Perform sensitivity analysis. 6. Make recommendations.

Answer 131

- Market Values: Use market prices (e.g., production costs). - Non-Market Values: Require valuation methods like willingness-to-pay (WTP) for amenities (e.g., clean air). Challenge: Creating markets for non-market goods often involves surveys and estimations.

Answer 132

- Definition: Systematic tendency to overestimate benefits and underestimate costs. - Causes: Overconfidence, especially in privately commissioned or rushed studies. - Solutions: Adjustments based on empirical research and past project outcomes.

Answer 133

- Purpose: Addresses uncertainties in cost, benefit, and discount rate estimates. - Method: Evaluates NPV under various scenarios to create a range of possible outcomes. - Key Insight: Provides decision-makers with a more robust understanding of potential risks and benefits.

Answer 134

- Social Discount Rate (SDR): Used to evaluate long-term social projects. - UK Example: Declining SDR (3.5% for 0-30 years, decreasing for longer horizons). - Debate: Higher rates devalue future benefits; lower rates prioritize long-term outcomes.

Answer 135

1. Strategic Errors: Studies skewed by vested interests. 2. Omission Errors: Ignoring significant costs or benefits. 3. Measurement Errors: Inaccurate data or assumptions. 4. Forecasting Errors: Simplifying complex systems for ease of analysis. 5. Valuation Errors: Misestimating WTP/WTA for non-market values.

Answer 136

- Objective: Reduce emergency department (ED) overcrowding in Houston via telehealth triage. - Costs: Staff time, physician video consultations, equipment. - Benefits: Reduced ambulance use, fewer ED visits, and societal savings. - Result: $103 saved per patient, with reduced ED overcrowding (74% in control group vs. 67.2% in telehealth group).

Answer 137

- Objective: Estimate willingness-to-pay (WTP) to avoid IQ loss caused by chemical exposure. - Method: Surveys across 11 countries, explaining impacts of action vs. inaction. - Challenge: Difficulty in explaining and valuing abstract concepts like IQ impacts.

Answer 138

- Calculation: Compare discounted costs and benefits to assess policy feasibility. Decision Framework: - Positive NPV → Recommend implementation. - Compare alternatives → Rank by NPV. Limitations: Ethical and equity considerations may override pure economic recommendations.

Answer 139

To estimate the willingness-to-pay (WTP) to avoid the negative impacts of chemicals on IQ in 11 countries, using non-market valuation techniques. Key Points: 1. Focused on IQ losses caused by chemicals like mercury and arsenic. 2. Estimated economic benefits of banning harmful substances. 3. Evaluated societal WTP to avoid IQ point reductions.

Answer 140

IQ is the best predictor of educational outcomes. Lower IQ correlates with reduced educational attainment and life opportunities. Bellinger (2012): Americans lost 41 million IQ points due to chemical exposure.

Answer 141

1. Presented respondents with hypothetical children with IQ scores of 110, 100, or 90. 2. Asked participants their WTP to avoid a 1- or 5-point IQ loss. 3. Used a double-bounded dichotomous choice model to refine WTP estimates. Example Question: “Would you pay $30/month to avoid a 5-point IQ reduction in your child?”

Answer 142

Average annual WTP: $609. Implication: Any policy costing less than this amount to reduce IQ losses would be economically justified based on preferences.

Answer 143

- To confirm participants understood the information. - To ensure their responses reflected real-life decision-making. Example: Asking if the proposed chemical ban seemed plausible.

Answer 144

- Highlights uncertainty in catastrophic climate change damages. - "Fat tails" mean the probability of extreme damages is non-negligible. - Implications: Standard CBAs may underestimate the risks, leading to insufficient action.

Answer 145

- States that the non-zero probability of catastrophic damages leads to very high WTP for prevention. - Suggests CBAs should account for structural uncertainty and "fat tails" to better guide policy decisions.

Answer 146

1. Limited public understanding of abstract metrics like IQ. 2. Reliance on hypothetical scenarios to gauge WTP. 3. Difficulty in translating qualitative impacts into monetary terms.

Answer 147

- Provides a transparent, systematic framework to assess interventions. - Helps compare the economic costs of inaction vs. proactive measures. - Examples: Assessing the economic feasibility of banning harmful chemicals or enacting climate policies.

Answer 148

- Ethical Concerns: Abstracts equity and justice issues. - Uncertainty: Hard to predict long-term impacts and societal preferences. - Discount Rates: Discounting future generations' benefits can lead to undervaluing long-term risks.

Answer 149

- Reflect society’s preference for current benefits over future ones. - Governments often use declining rates to account for long-term impacts. - Example: UK uses 3.5% for 0-30 years, gradually declining for longer horizons.

Answer 150

1. Rank Alternatives: Use NPV to prioritize projects. 2. Account for Uncertainty: Include sensitivity analyses to guide robust decision-making. 3. Address Equity: Complement CBA with considerations for justice and fairness.

Answer 151

It is the process of combining individual preferences to make collective decisions, such as through elections or social welfare functions. Key Issues: - Aggregation methods influence policy desirability. - Incentives of elected officials may not align with societal welfare.

Answer 152

1. Unrestricted Domain: Works for any set of preferences/policies. 2. Non-Dictatorship: No single individual determines societal rankings. 3. Pareto Principle: If everyone prefers A to B, society ranks A above B. 4. Independence of Irrelevant Alternatives (IIA): The ranking between two options depends only on preferences for those options.

Answer 153

Adding an irrelevant option should not change the ranking of existing options. Violating IIA can lead to inconsistent outcomes, such as in voting or decision-making. Example: - A customer prefers coffee over tea. - When chamomile is introduced, the customer switches to tea. - The introduction of chamomile (irrelevant) should not affect the original ranking.

Answer 154

While simple, it can lead to: - Tyranny of the majority: Minority preferences are overridden. - Instability: Cycles where no single option consistently wins pairwise comparisons (Condorcet cycles).

Answer 155

A policy that wins all pairwise comparisons against other policies.

Answer 156

A situation where preferences cycle without a clear winner (e.g., A > B, B > C, C > A).

Answer 157

A voting system where individuals rank policies, and the rankings are summed. The policy with the lowest total score wins. Issues: Allows IIA violations: Changing rankings of unrelated policies can alter the outcome.

Answer 158

- No consistent winner in majority rule (e.g., Condorcet cycles). - Violations of IIA in methods like Borda Count. - Rankings depend on irrelevant alternatives or external factors.

Answer 159

Situations where government actions do not maximize societal welfare, leading to inefficiencies, such as: - Corruption: Redistributing wealth through connections, increasing costs, and creating bad incentives. - Suboptimal policies: Driven by self-interest or electoral incentives rather than public good.

Answer 160

1. There is no perfect method to aggregate preferences without violating some desirable criteria. 2. Societal decisions often deviate from ideal social welfare outcomes. 3. Practical systems must trade off certain criteria to function.

Answer 161

- Highlights challenges in designing fair and stable voting systems. - Explains why "politics doesn’t work" sentiment arises when decisions deviate from societal preferences. - Informs the design of voting and policy-making mechanisms.

Answer 162

- To get elected and remain in power. - To propose policies that maximize voter appeal, which may not align with long-term societal welfare.

Answer 163

A model demonstrating that competitors in a spatial market tend to cluster in the middle to maximize their share, even at the cost of customer convenience. Example: - Two ice cream sellers on a beach tend to position themselves at the center to each capture half the customers, reaching a Nash equilibrium.

Answer 164

Political parties, like businesses, converge toward moderate policy positions to appeal to the largest number of voters, reflecting a tendency toward the center.

Answer 165

A theory by Anthony Downs that applies market logic to politics, suggesting political parties adjust policies to attract the median voter, assuming single-peaked preferences. Median Voter Theorem: The policy most preferred by the median voter becomes the Nash equilibrium because no party benefits by deviating from it.

Answer 166

In elections with single-peaked preferences, the policy preferred by the median voter will be adopted by all competing parties to maximize votes.

Answer 167

There may be no stable equilibrium. Politicians constantly adjust positions to capture votes, leading to instability (e.g., in preferences over Brexit and social policies).

Answer 168

Different systems influence voter incentives, representation, and campaign strategies, as seen in the UK, US, and Italian systems.

Answer 169

First-past-the-post: Constituencies elect one MP based on the majority of votes. Prime Minister: Leader of the majority party forms the government. Issues: Disproportionate representation. Tactical voting to prevent less-favored candidates.

Answer 170

Voting strategically for a less-preferred candidate to prevent an undesirable candidate from winning. Common in systems like the UK's first-past-the-post.

Answer 171

Electoral College: States vote for electors proportional to their representation in Congress. Swing States: Campaigns focus on competitive states where outcomes can determine the election. Issue: The winner may not have the majority of popular votes, as seen in recent elections.

Answer 172

Mixed System: 3/8 seats via majority system favoring local or large parties. 5/8 seats proportionally distributed among parties gaining at least 3% of votes. Issues: Voters can't separate preferences for candidates and their parties. System complexity and absenteeism.

Answer 173

1. Disproportionate influence of smaller states. 2. Campaigns focus on swing states, neglecting others. 3. Outcomes may not align with the popular vote.

Answer 174

A question of ensuring accountability and preventing abuse of power by those in authority, central to debates on government structure and political economy.

Answer 175

Institutions that distribute power broadly and ensure accountability, reducing the risk of elite capture and political failures (Acemoglu and Robinson).

Answer 176

Protests are a way for groups of people to express their policy preferences, especially when conventional methods like voting are inaccessible or ineffective. Activism brings attention to overlooked issues and pushes for change, often underlining the limits of tools like cost-benefit analysis (CBA) in policymaking.

Answer 177

Movements against slavery and apartheid: Examples include Nelson Mandela’s fight against apartheid in South Africa. Suffragette movements: Advocated for women’s right to vote. LGBTQIA+ movements: Fought for equal rights and an end to discriminatory laws. Civil rights movements: Focused on racial equality and social justice. Disability rights movements: Aimed to ensure equal opportunities and access for people with disabilities.

Answer 178

Dolores Huerta and Cesar Chavez: Founded the United Farm Workers Association, advocating for better conditions for agricultural workers. Mahatma Gandhi: Led nonviolent resistance that ultimately achieved India's independence. Nelson Mandela: South Africa's first democratic president, who fought against apartheid. Noe Noe Wong-Wilson and Rivera Zea: Indigenous activists opposing the construction of the Thirty Meter Telescope on Mauna Kea.

Answer 179

Protests often emerge from marginalized groups without access to conventional methods of political participation. Discrimination based on race, ethnicity, gender, sexual orientation, disability, or age motivates people to protest. Economically, this is puzzling because inclusion correlates with better economic outcomes, but discrimination persists.

Answer 180

Data suggests that economic growth correlates with increased inclusion. However, it’s hard to establish causation because macro data may obscure historical factors like colonization, political systems, and war that contribute to inequality.

Answer 181

Background The Civil Rights Movement was a fight for social justice, particularly for Black Americans, who faced systemic racism and segregation despite slavery being abolished in 1865. Q: What were Jim Crow laws? State and local laws enforcing racial segregation in public spaces, barring Black Americans from equal opportunities in housing, education, and voting.

Answer 182

1868: The 14th Amendment granted Black Americans equal protection under the law. 1870: The 15th Amendment granted Black men the right to vote, but systemic barriers persisted. 1941: President Roosevelt allowed all Americans to apply for defense jobs regardless of race. 1948: President Truman ended military discrimination through Executive Order 9981. 1955: Rosa Parks’ refusal to give up her bus seat initiated the Montgomery Bus Boycott. 1960: The Supreme Court ruled segregation in interstate transportation unconstitutional, inspiring Freedom Riders. 1963: The March on Washington, featuring Martin Luther King Jr.'s "I Have a Dream" speech. 1965: The Voting Rights Act was passed, prohibiting racial discrimination in voting. 1968: The Fair Housing Act outlawed housing discrimination based on race, sex, or religion. Activists encountered violence, police brutality, and systemic racism. High-profile assassinations (e.g., Malcolm X in 1965 and Martin Luther King Jr. in 1968) left the movement without key leaders.

Answer 183

Secured landmark legislation like the Civil Rights Act (1964), Voting Rights Act (1965), and Fair Housing Act (1968). Demonstrated the power of grassroots organizing and collective action. Despite legislative victories, systemic racism and socioeconomic inequality persist in areas like housing, education, and employment.

Answer 184

Traditional View: Focuses on charismatic leaders like Martin Luther King Jr. and significant legislative achievements. Grassroots Perspective: Highlights the role of local communities and grassroots organizations.

Answer 185

Protests have led to significant policy changes, even when faced with resistance. Examples like the Civil Rights Movement show what people can achieve collectively, even in the face of systemic oppression.

Answer 186

In South Carolina, 90% of manufacturing jobs were allocated to white workers, despite the state having a Black majority since the 1920s. Education restrictions further limited opportunities for Black workers to secure better jobs. Labour shortages in the textile industry eventually drove change, highlighting the role of activism in reshaping industries.

Answer 187

Social movements reduced discrimination in education and various economic sectors. Changes were long-lasting, with higher representation in labour markets persisting even during economic downturns in the 1970s. Migratory patterns show some workers returning to southern states, benefiting from the improved environment. However, quantifying activism's direct economic impact remains challenging due to concurrent growth drivers.

Answer 188

Early Strikes (1830s and 1842): Workers organized strikes as a means of bargaining for better pay and working conditions, marking the first politically motivated actions by large groups. Peaks of Strikes (1891–1970s): Official UK statistics highlight nine major strike peaks, causing millions of workdays lost. Key Strikes: National Coal Strike (1912): First national coal miners' strike aimed at securing a minimum wage of £82 annually. Battle of George Square (1919): Violent protests demanding a reduction in the working week from 47 to 40 hours. General Strike (1926): A 9-day strike opposing wage cuts for coal miners. The strike gained support from King George V, though politicians opposed it. Winter of Discontent (1978–79): Public and private workers protested wage caps, triggering significant political shifts, including Margaret Thatcher's rise to power. Striking in Recent Times: Industrial action continues today, often reflecting dissatisfaction with living standards. Strikes in 2022 led to disruptions in transportation, costing the economy an estimated £700 million and impacting sectors like hospitality

Answer 189

Striking is a form of expressing preferences, incurring short-term costs (lost wages, effort) for potential long-term benefits (higher wages, improved conditions). Economic Framework of Protests: Traditional utility models struggle to explain activism, which often involves present costs for uncertain future benefits. Protests reflect long-term utility maximization, considering benefits that span years or even generations.

Answer 190

Recognition: Organizers and leaders gain personal and societal recognition, aligning with rational incentives. Altruism: People derive utility from raising the well-being of others, akin to positive externalities. Warm-Glow Giving: James Andreoni’s theory of “impure altruism” suggests that people experience positive emotions simply by acting prosocially, regardless of actual outcomes. Avoidance of Guilt: Guilt avoidance and the desire for belonging can drive participation in protests, even when costly. The “bandwagon effect” amplifies collective action.

Answer 191

Recent psychological research highlights these factors: 1. Lack of Trust in Governments: Distrust fuels the need for direct action. 2. Shared Grievances and Identity: Collective frustration and solidarity unify protestors. 3. Shared Intensity: A common emotional drive pushes people to act. 4. Geographic Proximity: Protests often arise in close-knit communities. 5. Anonymity: Collective action reduces individual risk. 6. Efficiency: Collective protests achieve goals more effectively than isolated efforts. 7. Survival Instincts: Protesters may see action as necessary for survival, triggering a “fight rather than flight” response.