Fairness and Efficiency

Question 1

Economics

Answer 1

The study of how people interact with each other and with their natural surroundings in providing their livelihoods and how this changes over time

Question 2

Evaluating Economic Outcomes

Answer 2

Allocation: who does what and who gets what
- If allocation is efficient: could there be mutual gains from moving to some other allocation?
- Is allocation fair: If there’s some allocation that could be fair

Question 3

Allocations and Values

Answer 3

• Efficiency: There’s no alternative technically feasible allocation in which at least 1 person would be better off and nobody worse off
• Fairness: Evaluation based on one’s conception of justice
  Values to consider:
  1. Diversity
  2. Social cohesion
  3. Individual dignity and freedom

Question 4

The Pareto Efficient

Answer 4

If nobody can be better off without making somebody worse off

Question 5

The Pareto Criterion

Answer 5

Helps us judge between two allocations
- Says nothing about fairness
e.g. unequal distribution of food- some people will starve is a PE as long as food is eaten by someone who enjoys it even a little.

Question 6

Games

Answer 6

Describes a social interaction:
1. Players- who’s involved interactions
2. Feasible strategies- actions each player can take
3. Information- what each player knows when choosing their action
4. Payoffs- outcomes for every possible combination of actions

Question 7

The Invisible Hand: when self-interest works

Answer 7

Pursuit of self-interest without regard to others can be considered morally bad, economics considers cases which it can lead to outcomes that are socially desirable.
- Choosing a strategy that yields the largest total payoffs.

Question 8

Pareto Criterion for Policymakers

Answer 8

Few Pareto Improvements: policymakers makes changes that rarely = win-win situations:- losers from any policy changes
Compensation: Pareto Criterion doesnt take into account the possibility of the second stage of the game:- this leaves both players better off
When combined with compensating those losing out from policy change, the Pareto criterion starts being helpful.

Question 9

Defining Fairness

Answer 9

Allocation can be judged unfairly by:
- How unequal they are: In terms of income etc, these are substantive judgement of fairness based on characteristics of the allocation itself
- How inequalities came about: In terms of racial discrimination etc, these are procedural judgements of fairness

Question 10

Procedural judgements of fairness

Answer 10

Evaluates rules of the game through:
- Voluntary exchange of private property acquired by legitimate means
- Equal opportunity for economic advantage
- Deservingness

Question 11

Implementing Public Policies

Answer 11

Outcome of a public policy is the result of an interaction between the government’s actions and the privately chosen actions of those affected

Question 12

Policies Effect on Economic Outcomes

Answer 12

Incentives: A policy changes the benefits or costs of alternative courses of action open to the individual.
The information available: People can use all available information when they make decisions about which actions to take.
- New Allocation wont be unless it’s a Nash Equilibrium