Fairness and Efficiency Flashcards
Economics
The study of how people interact with each other and with their natural surroundings in providing their livelihoods and how this changes over time
Evaluating Economic Outcomes
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
Allocations and Values
- 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
The Pareto Efficient
If nobody can be better off without making somebody worse off
The Pareto Criterion
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.
Games
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
The Invisible Hand: when self-interest works
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.
Pareto Criterion for Policymakers
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.
Defining Fairness
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
Procedural judgements of fairness
Evaluates rules of the game through:
- Voluntary exchange of private property acquired by legitimate means
- Equal opportunity for economic advantage
- Deservingness
Implementing Public Policies
Outcome of a public policy is the result of an interaction between the government’s actions and the privately chosen actions of those affected
Policies Effect on Economic Outcomes
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