Micro 21: Behavioural Economics and Government Policy Flashcards
How can choice architecture be used to correct market failure?
This refers to how choices may be influenced by the way they’re presented to the decision marker, to achieve the desired outcome. This is done without removing freedom of choice- ‘libertarian paternalism’. It corrects market failure as governments use it to make government policy more effective so that people can make decisions that benefit themselves and society, thus reducing deadweight loss as they’re closer to reaching the social optimum.
What are examples of choice architecture?
-The location of a salad bar in a restaurant
-The location of stairs being more accessible than escalators
-Hand sanitiser placement on walls
Evaluate choice architecture?
How can framing be used to correct market failure?
It’s a form of choice architecture that influences choices by the way words and numbers are used. People decide on options based on positive or negative semantics (as a loss or gain- loss aversion). Framing it to play on people’s fears reduces the underconsumption of merit goods/ reduces the overconsumption of demerit goods which moves the MPB curve closer to the MSB curve and reduces the deadweight loss to society.
What are examples of framing?
-Packaging highlighting sugar/fat content
-Advertised as monthly payments rather than annual or one-off, eg. for gyms to make it seem less expensive
-Calorie content in menus
-Charities, eg. you can save a child’s life for the price of a cup of coffee
-“If you do not get the flu vaccine, you are more likely to get the flu”
Evaluate framing?
How can nudges be used to correct market failure?
They’re a form of choice architecture that aim to influence consumer behaviour via the use of gentle suggestions and positive reinforcement. They can correct market failure as they can change people’s behaviour in a socially desirable manner without taking away their freedom of choice, thus moving the MPB curve closer to the MSB curve.
By making demerit goods less accessible, its overconsumption is reduced.
They can also be a more cost-effective alternative to the use of laws, bans or regulations and can complement traditionsl policy methods, eg. adverts to create seatbelt norms
What are examples of nudges?
-When online gambling sites send email/text alerts to customers informing them of upcoming races and odds
-Junk food, tobacco etc. is concealed in supermarkets so it’s less convenient to buy, fruits are placed at the front
-Making bins look like animals to encourage littering, more fun
Evaluate nudging?
How can default choice/ mandated choice/ restricted choice be used to correct market failure?
Default
