Market Failure and Social Traps Flashcards
Given ______ and ______ (two global trends), we should expect to see ______ (four results)
(I) the wide endorsement of liberalism around the world
(II) the increasing adoption of democracy worldwide
(1) greater trade promotion
(2) a supportive, but non-interventionist, government
(3) institutions that encourage cooperation and greater
exchange of information/goals
(4) self-sustaining interdependence
Market Failure
occurs when the conditions for an efficient market do not exist
Social Trap
results when individual rational choices lead to sub-optimal social outcomes (ex: prisoner’s dilemma)
(a) often related to provision of collective goods
(b) a collective good has 2 defining characteristics: non-excludability and jointness of supply (my consumption does not decrease your consumption) (ex: national security defense programs)
(c) given these characteristics, individuals have incentives to free ride (enjoy the benefits without contributing to the provision of those benefits) –> unlikely that these goods will be provided, despite their societal benefit
(d) dominant strategy is to “defect”
(e) cooperation is especially difficult when discount rate is high (players value the present more than the future, most commonly due to electoral concerns); however, can be a good thing when it comes to cartel behavior (ex: OPEC)
(e) examples: international prisoner’s dilemma, protectionist policies, overfishing
Market Conditions (1 of 4)
clearly defined property rights –> incentive to invest in the future (which is why communism in its purest form, with the complete abolishment of private property, is unsustainable)
Market Conditions (2 of 4)
no buyer/seller can manipulate the price system to obtain extra-market rents
(a) monopsonist: single buyer (Thailand’s rice program, in which the government buys rice from producers)
(b) monopolist: single seller
Market Conditions (3 of 4)
transactions have no effect on third parties (externalities)
Market Conditions (4 of 4)
complete information
(a) firms and politicians try to manipulate information through campaigns and advertisements
(b) successful markets try to limit this through disclosure laws, campaign finance laws, contract laws, standard-setting bodies, etc.
Externalities
effects on a third party in a transaction that is NOT included in the cost of the good/service
(a) positive: flu vaccines (government intervention in the form of subsidies)
(b) negative: environmental degradation (government intervention in the form of taxes)
Strategies to overcome social traps (1 of 5)
hierarchies - the threat and use of sanctions can alter individual incentives
(a) hegemonic stability theory: due to their size, hegemony often receive a large share of the benefits from collective goods –> have a greater incentive to maintain the system, even if it means their contributions are disproportionate or they have to engage in costly coercion
(a. i) US in NATO
(a. ii) Saudi Arabia in OPEC
Strategies to overcome social traps (2 of 5)
selective incentives: transfer of additional benefits to ensure cooperation
(a) special incentives for poorer developing countries to encourage their participation in WTO
(b) special deals on weapons and training for certain countries in NATO
Strategies to overcome social traps (3 of 5)
entrepreneurship: reliance on certain individuals to supply energy, organization skill and inertia to provide collective goods
(a) neighborhood watch in local communities
(b) Nordic countries providing a platform for negotiation because of their neutrality
Strategies to overcome social traps (4 of 5)
piggybacking: established organizations take on new concerns
(a) religious organizations taking on political/social justice responsibilities (e.g. homelessness)
Strategies to overcome social traps (5 of 5)
reduce group size
(a) makes moral suasion more effective
(b) makes each individual contribution more important, altering actors’ cost-benefit analysis
(c) more targeted sanctions (specific individuals, transactions)
