Unit 2- Ethical Decision Making Flashcards
Market
a place where goods or services are bought and sold.
Decision Making in the Market
Decisions in the market are made based on price; which is determined by supply and demand.
Main feature of the Market System
- Private ownership of resources to make goods and services
- Voluntary Exchange- Individuals and firms are free to enter into mutually beneficial trades
- Profit Motive: Where economic actors trade to advance their own self-interest
General justifications of the Market system
-Promotion of Efficiency, and hence, welfare.
Arguments Justifying Market Systems
Utilitarian argument- Market systems produces the highest possible level of welfare for society (because they want reach efficiency- greatest output for least input)
Rights-Based argument- market system best protects our liberty, especially with respect to private property.
(Like in Free market system- more freedom to owning private property and trade)
Free Markets and Utility in Adam Smith’s theory:
Market competition ensures the pursuit of self-interest in markets and advances the public’s welfare. (Utilitarianism)
public’s welfare is lowered in markets where government interferes (linked with rights-based argument)
John Locke thought on Free Market
Free-market economy should set rates as govt. Regulation could have unintended consequences
PURE Monopoly Market System
A single firm is the only seller in the market and new sellers are barred from entering.
- One dominant seller
- Control over the supply and price
- Monopoly profit can be made by selling less and charging more
- High Barriers to entry
Ethical Weaknesses of Monopolies
- Violates capitalist justice. -charging more for products than producer knows they are worth
- Violates utilitarianism. -removing incentives to use resources efficiently
- Violates negative rights. - forcing companies to stay out, customers to buy what they do not want with price and quantity they do not want to be determined by the monopoly.
Perfect Competition
A free market in which no buyer or seller has the power to significantly affect the prices at which goods are being exchanged.
- Many sellers, many buyers
- Perfect Knowledge
- Freedom to entry and exit
- Homogeneous goods
- No govt interference
Oligopoly
A market shared by a relatively small number of large firms that together can exercise some influence on prices.
Unethical Practices of Oligopolies
- Price-Fixing
- Manipulation of Supply
- Predatory Price discrimination- Each company lowers prices to knock out the other one.
Main views on Oligopoly Power
- Do-nothing view- Do nothing since the power of oligopolies is limited by competition between industries and by countervailing the power of large groups
- Antitrust View- Large monopoly and oligopoly firms are anticompetitive and should be broken up into small companies
- Regulation View- Big companies are beneficial but need to be restrained by government regulation.
Fraud
Material misrepresentation that is made with an intent to deceive
Fraud Triangle- (Used in auditing to asses the risk of fraud)
- Pressures/strong incentives to do wrong(peer pressure, personal incentives)
- The Opportunity(includes the ability also)
- Ability to Rationalize
Rationalizations of Fraud
- No harm No Foul
- I deserve this
- It is for a good cause
- If I don’t do it someone else will
Rationalizations of Fraud
- I deserve this
- Everyone is doing it
- If I don’t do it someone else will
- It’s what’s best for the company
Market Failure
Failure of free market to allocate resources
Causes for Market Failure
- Perfect Competition- Market fails because they deviate from perfect competition characteristic of efficiency.
- Perfect Rationality- Meaning consumer behaviour is wholly based on maximizing utility, which doesn’t exist, as there is bounded rationality- where lack of info causes consumers not to make choices to maximize utility. Eg- I want ice cream, but the prices are very low, and that’s the only info I have and there seems to be no other reason; I might just assume that the ice cream tastes bad and not buy it.
- Externalities- Positive externalities- Underproduction/consumption; Negative externalities- Overproduction/consumption
- Collective choice- If the people are rational, they will vote for things that will promote their own welfare, which will promote collective welfare (Utilitarianism- self interest advocacy)
Prisoner’s Dilema
The paradox in decision analysis in which two individuals acting in their own self-interests do not result in the optimal outcome.
Remember Dave and Henry- Prisoners
What is an Agent
A party that has been engaged to act on behalf of another (the principal)
- Relationship called Agency Relationship
What is a Fiduciary
A person who has been entrusted with the care of another’s property or assets
-Can make whatever decisions they want with it
Fiduciary relationship has two elements:
Trust and Confidence
What are the three main elements of Fiduciary Duty
- Duty of Candour: to disclose all information that the beneficiary would consider relevant to the relationship
- Duty of Due Care: A care that a reasonable, prudent person would exercise.
- Loyalty: Requires that Fidicuary:
1. Act in the best interest of the beneficiary, and
2. Avoid taking any personal advantage- deriving any benefit from the relationship without the knowledge of the beneficiary.
What are the Three common defining features of a Professional
- A specialized body of knowledge
- A high degree of organization and self-regulation
- A commitment to public service
Problems and Solutions in Ethics in Markets
P S
Violation of Agreements (Contract Law) Contract Law,
Principles for Promise Keeping
Misrepresentation of Information (Fraud) Anti-Fraud Law
Principles for Honesty
Wrongful harm of others (torts) Tort Law
Principles for Due Care
Market Failure(Inefficiency Govt. Regulation-
antitrust laws,
consumer laws,
employment laws, taxation.
Special use of Market
Mechanisms (Price floor, ceiling)
Trust Worthy Behaviour
What is Ethical Reasoning?
An intellectual procedure for justifying ethical judgments
Lawrence Kohlberg’s Perspective on Ethical Reasoning
Level Stages Ethical Reasoning
Pre- Conventional 1. Obedience and Punishment Focused on self and
Morality Orientation and cant do “other-
2. Self-Interest Orientation oriented” ethical
reasoning
Conventional 3. Good Interpersonal Relations People* are mindful of Morality 4. Authority and Social others, understand
Order Orientation rules and laws, and
conform to societal
expectations.
*Most adults
Post-Conventional 5. Social Contract and People* can engage
Morality Individual Rights in mutually,
Orientation advantageous cooperation,
6. Universal Principle understand the value
Orientation of abstract moral principles,
and practice sophisticated
ethical reasoning.
*Fewer than 20% of adults
What makes up the Framework for Ethical Reasoning?
- Awareness of issues
- Identifying issues
- Resolving issues
What are the seven principles of Business conduct?
Welfare, Duty, Rights,
Fairness, Honesty, Dignity, Integrity
Issues in contracts that make a breach hard to identify
Implicit- Not written or signed, but rather implied (Done to avoid being legalistic over everything), and therefore cannot be legally enforced. Causes disagreements too, one person may see a breach, the other may not
Incomplete- Transaction too complex and uncertain, impossible to draft in detail. E.g. Drafting a contract to hire a CEO
Lack Remedies- In the market more focus is placed on the obligations of each party, but there is ambiguity in what should be done in the cases of a breach
Considerations in cases of Wrongful Harms
Basic Morality obligation to each other
Compensation to be given to the sufferer
Types of Wrongful Harms
Failure to Fulfil Due Care
Negligence
On the side of victims, what do wrongful harms typically involve?
A violation of rights
