ESG Flashcards
1
Q
Public good
A
both non-excludable and non-rivalrous
2
Q
Categorical Imperative
A
Act as you would want all other people to act towards all other people, as if it was a universal law.
3
Q
Economic Freedom
A
the fundamental right of every human to control his or her own labor and property
4
Q
Consumer sovereignty
A
the situation in an economy where the desires and needs of consumers control the output of producers.
5
Q
Opportunity Cost
A
The sum of the dollar values of the best-foregone alternative
5
Q
What does the gov do?
A
1) Provides a stable trading environment (law and macro policy).
2) Provides certain goods and services (education, national defence, utilities, healthcare, infrastructure).
3) Makes regulations (labour law, environmental, financial, competition, housing, etc.)
4) Taxes and subsidies
5) Redistributes wealth and provides for the underprivileged (welfare).
6
Q
Marginalist principle
A
Any policy should be carried out as long as marginal benefit > marginal cost
7
Q
Sunk cost
A
an expense that’s already been incurred and can’t be recovered (not relevant to decision making)
8
Q
Which costs are relevant to decision-making
A
Opportunity costs, accounting costs, (externalities?)
9
Q
Paradox of value
A
diamonds cost more than water but water is more essential this is because prices are determined ON THE MARGIN. People will pay very high prices when it is scarce vs for diamonds ppl would pay less but since it is scarce vs water is not people pay more for diamonds. The current prices of these goods are different due to the difference in supply.
10
Q
The law of unintended consequences
A
policies that fail due to perverse incentives.
11
Q
Perverse
A
people adjust their behaviour to a policy’s incentive in
ways that counteract the policy’s intended effect
12
Q
Example of perverse incentives
A
Capping interest rates at 4% promotes illegal high-interest-rate payday lending.
People driving more recklessly when they have more safety features in their cars.
13
Q
Peltzman effect (and example)
A
Individuals respond to safety laws by engaging in more dangerous activities, which balances out cautious behaviour.
ex. Safety features in cars increase the number of non-fatal crashes.
ex. Opioid use in the US. As naloxone access increased, the number of ER visits increased but the mortality rate DID NOT CHANGE. People’s actions completely offset the effects of the policy.
14
Q
The laffer curve
A
Increased tax rates increase tax revenues to a certain point and then decrease them as people as encouraged to move away or work less hard.
(https://www.investopedia.com/terms/l/laffercurve.asp)
^Upside down quadratic function
Ex. free doctors visits, unemployment insurance
15
Q
Examples of incentives crowding out intrinsic motivations.
A
a. donating blood
b. day-care centre late fees (people picked up their kids on time but then a fee for late pickup increased the amount of people who picked up late as they felt they were allowed)
16
Q
3 takeaways about incentives
A
a. Use opportunity costs not accounting costs to evaluate policies.
b.It’s not all or nothing. : Expand beneficial policies up to the point where marginal benefits equal marginal (opportunity) costs.
c. Well-intended policies can have undesired impacts, often because of failure to consider incentive effects.
- Even attempts to use incentives can go wrong.
- Many well-intended policies actually do work because the unintended consequences are small or even negligible.
17
Q
Private ownership/decentralized (competition)
A
Market capitalism (private enterprise)
18
Q
Public/decentralized (competition)
A
Market socialism (ex. China)
19
Q
Private/centralized
A
Monopoly Capitalism
20
Q
Public/centralized
A
State-directed socialism
21
Q
Market economy
A
prices and quantities for most goods and services are determined in competitive markets.
- Prices determined by supply and demand
- Demand represents the aggregate preferences of consumers (consumer sovereignty)
- Goods are supplied by individuals/firms pursuing profitable opportunities (economic freedom)
22
Q
Economic Freedom
A
Consenting adults can engage in mutually advantageous transactions.
Backed by institutions through
a. Secure system of private property rights
b. Freedom of contract: freely choose contract partner and rules of enforcement
23
Q
Freedom of contract
A
freely choose contract partner and rules of enforcement
24
Consumer sovereignty
The consumer is the ultimate determiner of what will be made and sold and consumed.
25
Limitations on consumer sovereignty
BBC and the £159 (in 2021) TV license fee;
Germany has €210 annual TV license fee regardless of use.
legal drinking ages (19 in BC)
government-funded anti-smoking campaigns
China’s one child policy (changed in 2016 to two-child policy)
26
Limitations on economic freedom
Some transactions are illegal:
sell your organs
sell (or buy) drugs
sell alcohol to minors
to hire child workers
“people smuggling”
sell babies
sell or buy prohibited firearms
27
Low economic freedom examples
Venezuela, Cuba, North Korea
28
High economic freedom examples
Singapore, Switzerland, Ireland, Taiwan, Luxembourg, NZ, Estonia, Denmark, Sweden, and Norway (1-10)
29
Examples of the benefits of market economies
Countries divided after WWII: Korea, Germany, China/Taiwan.
West Germany (capitalist) vs East Germany (socialist). People migrated to West. Incomes in West were/are still higher.
South Korea (capitalist) vs North Korea (socialist). South Korea has a much higher GDP per capita and much higher output overall.
Taiwan (Capitalist) vs China (socialist). Taiwan is more productive.
30
Adam Smith's invisible hand
Founder of capitalist theory.
By pursuing his own self-interest, the entrepreneur frequently promotes that of society more effectually than when he means to promote it.
Self-interested individuals end up doing what's best for society in a free-market scenario. Producers are motivated to produce what's socially necessary when consumer sovereignty is present.
(Similar to Milton Friedman's magic of the market).
Ex. Steve Jobs had to make the apple iphone a fantastic product to be competitive in the smartphone market. He was motivated by his own profit.
31
First Welfare Theorem
Under perfect competition, markets achieve pareto efficiency.
32
Perfect competition (3 things)
a. No one seller has the power to set prices: sellers and buyers are price takers.
b. Entry of new firms (or exit of unprofitable firms) drives profits to zero.
c. Buyers and sellers have all info. No transaction costs.
ex. blueberries (no one cares who they buy them from)
33
Efficiency (2 kinds)
"Absence of waste"
a. Management efficiency
b. Pareto efficiency
34
Management efficiency / Production efficiency
a given level of output being produced at lowest input usage
lowest cost
34
Pareto efficiency / Allocation efficiency
appropriate amount of each good is produced
impossible to re-allocate the resources among a group of people in such a way as to make at least one person better off without making anybody else worse off
No DWL, market equilibrium is Pareto efficient (CS and PS are maximized)
^Economists give more emphasis to this
35
Why do economists care more about pareto/allocation efficiency over management/production efficiency.
In market theory, economists assume that competition will reduce the costs of all firms as unprofitable firms will go out of business.
36
Pareto improvement
at least one person is made better off while no one is made worse off
(rare in practice)
37
Potential Pareto improvement
re-allocation of resources allows those individuals who are net gainers to fully compensate the net losers, and still be better off.
ex. removing rent controls, expanding dairy quotas
(more common in practice, unsure whether the gainers actually compensate the losers)
38
Deadweight loss
A DWL is a reduction in economic efficiency when market equilibrium for a good/service is not achieved.
- Deviation from Pareto effiency
- Sum of gaps between willigness to pay and cost of supply
- DWL is wasteful because money was left on the table and mutually beneficial transactions were not realized.
39
Distortion
When Gov policies change the level of output produced and consumed away from QC. (This can cause DWL)
- Gains to winners are less than losses to the losers in this case. Creates a triangle of DWL.
40
Macro failure
economy-wide failure to keep workers and capital fully employed.
40
4 types of market failure
1. Imperfect competition
2. Public goods
3. Externalities
4. Information imperfection/asymmetries
41
Imperfect competition (2 options)
a. buyers or sellers have pricing power (market power); or
b. blocked entry or exit
Ex. Monopoly, Cartels, Oligopoly, Monopolistic competition (less serious), Monopsony
42
Monopsony
markets where there is a single buyer (increasing concern in labour markets)
Ex. mining town with a mine, air force for air military equipment.
Min wage CAN reduce DWL in a monopsony labour market.
43
Monopolistic competition
a large number of sellers of differentiated varieties of the same product (a less serious type of market failure).
Prices can be set as demand is impacted by consumer preferences of the product, NOT ONLY by price.
44
Why do monopolies cause market failure
When forced to charge the same price to all consumers, it creates DWL due to too little output.
Sellers have market power.
45
What happens to P and Q under monopoly, oligopoly and monopolistic competition?
P is HIGHER than MC, Q is LOWER than Qc.
46
Cartels
multiple sellers who collude on price
Ex. Lysine price-fixing conspiracy
47
Public goods
enjoyed in common. Must be BOTH
a) Non-rivalrous - one person using it doesn't limit its availability
b) Non-excludable - available and accessible to everyone
Ex.
***Just because the gov chooses to provide something DOES NOT make it a public good.
48
Free riding (public goods)
Consumers can take advantage of public goods without contributing sufficiently to their creation
49
Private goods
Rivalrous/Excludable (food, clothing, cars, toys)
50
Common goods (fish, forests)
Rivalrous/Non-excludable
51
Non-rivalrous (simultaneous consumption)/excludable
Club Goods (television)
52
Non-rivalrous/non-excludable
Public goods
--> means a private seller cannot prevent the public from consuming it, so they would go out of business.
Ex. Air, national defense
53
What kind(s) of goods are often left to the market?
Private and club goods
54
What kind(s) of goods are often provided/regulated by the government?
Public goods
55
Agents in a market
Consumers, producers, and/or influencers of capital markets and the economy at large. There are four major economic agents: households/individuals, firms, governments, and central banks.
- People who make decisions in the market.
56
Externality
A by-product of an economic activity that is
a) NOT reflected in the PRICE
b) IMPACTS a THIRD PARTY
Negative: Noise, pollution, traffic
Positive: Crop pollination by bees
57
Non-priced in externalities
Benefits are not paid for and costs are not incurred voluntarily.
58
Property rights
the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism.
--> Could be a possible solution for market failures caused by externalities.
59
Incomplete property rights (externalities)
if everything has a clearly defined owner then one party would not be able to harm the property of another without compensation. (or to benefit from their property without paying)
If you own your "unobstructed view of the ocean". Then no one can block it without paying. This is a possible solution for the market failure caused by externalities.
The absence of property rights impedes market transactions.
60
Peruvian economist Hernando de Soto
argues that much of the economic activity in the world takes place in the informal sector, thus we must establish an information framework that records and protects property rights to have a strong market economy.
61
Asymmetric information
when one party knows product characteristics that the other does not know (mainly the seller knows and buyer does not know).
62
Exchange is guaranteed to be mutually beneficial ONLY IF parties are BOTH
a) Rational
b) Well-informed
63
Remedies for imperfect information problem (4 examples)
a) Markets for information (rating agencies, auditors)
Reputation
b) Review aggregators (Yelp, Trip advisor, Booking.com)
c) Labelling/disclosure requirements
d) Standards (set and enforced by the gov, business or professional organizations)
These are imperfect solutions because public policy interventions can create their own costs but private solutions are often insufficient.
64
Efficiency loss due to market failure (4 types)
a. With imperfect competition (monopoly), there is TOO LITTLE Q, and TOO LITTLE LABOUR (monopsony).
b. Public goods are under-provided by the market.
c. Negative externalities are over-provided, and positive externalities are under-provided.
d. Bad products are over-provided when their quality is NOT KNOWN, good products are underprovided (as consumer WIP is lower when quality is unknown).
65
Relativism
There is no absolute right or wrong but we can say acts are morally acceptable so long as they conform to society’s approved practices.
Ruth Benedict states that morality differs in every society, and is a convenient term for socially approved habits.
66
Universals
There are ethical principles we can apply to all societies across the world and across time.
67
Radical relativism
Our statements on ethical matters are really just statements of approval or disapproval (ex. Pineapples on pizza is wrong, missiles are wrong).
68
Outcome-oriented ethics (4)
Consequentialism
Benefits principle
Egoism
Utilitarianism
68
Cultural relativism
things are right or wrong depending on the culture and whether society approves or not.
Examples:
In Italy, it’s wrong to put pineapple on pizza (or drink cappuccino after noon) but it’s fine in Canada.
In Japan tipping is wrong, but in Canada not tipping is wrong.)
69
Consequentialism
The morality of an action depends solely on the consequences it brings about; the right thing is do whatever will produce the best state of affairs, all things considered.
Not a complete theory of ethics - what is a good outcome?
70
2 types of egoism
1. Psychological egoism: claim that self-interest is what motivates people as an empirical fact.
2. Ethical egoism: view that moral agents should do what is in their self-interest.
71
Justifications for ethical egoism
and arguments against
FOR
1. invisible hand
2. imposing preferences on others and charity is degrading and debilitating.
3. Ayn Rand: each individual life has supreme value and acting in the interest of others by sacrificing one's self destroys this value.
AGAINST
1. true psychological egoism is falsified (we can be kind)
2. Bad luck - It is difficult to be so selfish as to not help those in unfortunate circumstances.
3. Prisoner’s dilemma - egoism makes both parties worse off.
4. market failures - egoism DOES NOT maximise social surplus in this case.
72
Utilitarianism (who founded and what?)
What is means and what is ends.
Founded by Jeremy Bentham.
What increases the sum of all utility is best.
Means - money, land, grades.
Ends - happiness, pleasure, absence of pain and misery.
73
Problems of utilitarianism
a. Weak protection of individual rights: It is fine to sacrifice one person if everyone else benefits “substantially”. Justified torture?
b. Equal treatment of innocent and guilty, family and strangers.
c. Breaking promises and lying for the greater good.
d. Not bothering to vote (if, high opportunity cost).
e. Comparability of utility across individuals (try to monetize everything).
74
Benefits Principle
The outcomes that matter are benefits (and costs) experienced by people.
75
Duty-based ethics (3 rules)
Expressed in rules
Golden rule - Do unto others as you would have done unto you.
Kant's 1st rule - Categorical imperative. Act according to universalizable principles.
- Can everyone act this way?
- Would I want everyone to act this way?
Kant's 2nd rule - Practical imperative
Do not treat people as purely a means.
75
Issues with golden rule (2)
1. Not everyone has the same preferences
2. What to do when there is no "other"? Ex. Suicide, gambling, drugs.
76
Rule utilitarianism
Obey moral rules, which if universally followed, would maximize social utility.
Would this action raise or lower overall utility if it was used as a universal rule by everyone?
77
Flaw with rule utilitarianism
What if it is not plausible that everyone will follow the rule EVEN IF it maximizes total utility?
(Ex. driving on the left side of the road)
78
Informed consent
Exception to DO NOT treat anyone as means (Kant's 2nd rule - practical imperative)
What if they are a taxi driver or server?
It is ok as long as there is informed consent (no deception or coercion)
Reformulated practical imperative - never treat another human in a way that violates their autonomy.
79
Distributive Fairness
The final allocation of benefits (or goods) across individuals (or groups) is just (or morally acceptable).
--> Usually come at a cost of reduced efficiency
80
Egalitarian
Divide wealth equally (equal shares)
81
Procedural Fairness
The “rules of the game” are just (i.e., morally defensible) regardless of the final allocation that results.
Non-coercion - no individual forced to take an action he or she does not want to take
Rawlsian approach and equality of opportunity: choice behind a “veil of ignorance.”
President Johnson’s ‘footrace metaphor’: equality of the starting line and need for government to establish equal competitive conditions.
82
veil of ignorance.
Procedural fairness
You should design rules that take into account how the rules would affect your well-being in all the possible states you might find yourself in.
a) Maximin principle: Worry about the welfare of the least advantaged. (extreme risk aversion)
b) Absolute equality is not required. Inequality that is in the interest of the least well off is justified. For example, doctors can earn more if it results in better treatment for the sick.
83
Milton Friedman's view on CSR (3 things)
No, not their role!
Undemocratic - decisions should be made through democracy
Unwise - these corps are not experts in charity
Ineffective - manager might be fired AND consumers will reduce their business with the firm.
84
Friedman's rules of the game
1. Engage in open and free competition
2. Deception and fraud are not allowed.
85
Arguments for profit max instead of CSR
a) manager’s duty as an employee and an agent of the principal overrides his or her alleged social responsibilities.
b) Pursuing social responsibilities other than profit maximization is a form of “taxation without representation.”
--> likely to be inefficient and harm society as a whole.
86
Kenneth Arrow (2 situations where profit max does not yield efficient results)
1. Negative externalities (pollution)
2. Asymmetric info (firm knows more than worker about safety in the workplace)
87
Stakeholder theory (Edward Freeman)
Shareholders own limited rights to the corp through "stocks"
Managers have obligations to several groups in addition to shareholders.
88
potential solutions to market failure (4)
1. Regulation
2. Taxation
3. Legal responsibility: damage suits or "torts"
4. Social responsibility: moral obligations/ethics
89
2 problems with autocrats
1. Dictatorship biased toward bad outcomes (people will appeal to dictator)
2. No reliable way to remove a bad leader
90
Direct democracy
everyone gets and equal-weighted vote for yes or no (ex. referendum)
91
Representative democracy
Geographic voting districts
92
First past the post (Plurality)
a single-winner system of positional voting where voters mark one candidate as their favorite, and the candidate with the largest number of points is elected
DOES NOT REQUIRE MAJORITY APPROVAL
93
Characteristics of the left
seek to address market failures,
focus on distributional and group fairness
seeks to redistribute resources and privileges towards historically disadvantaged groups.
liberals generally push for win-win outcomes (Obama, Trudeau) progressives (Sanders, Warren) view is more zero sum: billionaires are the problem
94
Characteristics of the right
Libertarians focus on free markets and procedural fairness
Conservatives try to maintain status quo, pro-business
Far right wants to restore a “lost order” of the nation’s past. Often this involves suppressing immigration (or immigrants)
95
Equilibrium with a 2 party system
Both will be at the middle
96
There is no stable equilibrium with more than 2 parties
TRUE
97
Strategic voting
a voter supports another candidate more strongly than their sincere preference in order to prevent an undesirable outcome (in an election with more than 2 candidates).
98
Economic interest groups
unions, industries (e.g. restaurant assoc.), professions (e.g. trial lawyers), regions.
“Social” interest groups promote particular values or moral views
99
Rent-seeking / Transfer-seeking cost
growing one's existing wealth by manipulating the social or political environment without creating new wealth (ex. uber took profit from taxis but did not create new demand)
100
Sources of gov policy failure (3)
1. Unelected decision makers that pursue their own self-interest at the expense of public interest. This includes dictators and bureaucrats who are somehow insulated from voters.
2. Voting outcomes depend on process and need not give appropriate weight to all.
3. Interest group activity: may convey useful information but also reflect transfer seeking.
101
Tipping Points
Tipping points are thresholds that make a system change from one to another qualitative state. Threshold behaviour is based on self-reinforcing processes or “feedback loops.”
102
Issues with Merit-based rewards (Rawls)
Rawls argues for max-min principle, he wants policies to aid the least-advantaged group.
1. Merit is NOT measured as for what people do for the LAGs.
2. Merit may be biased towards some socio-economic groups.
3. Merit may be beyond individual's control. Ex. amount of sleep one needs, height, etc.
4. If these rewards can be passed on to the meritorious people's children, then there is an unfair advantage.
