Unit 5 - Collective Action Problems & Institutions Flashcards
Models*
abstractions (simplifications) that help us understand and interpret reality. They also help us in predicting future outcomes
Theory*
a system of ideas intended to explain a specific phenomenon (real world things) based on a shared body of principles
Ethical Philosophy*
an effort to define how society should function in terms of what is accepted as right and wrong behavior
Utilitarianism*
Is the view that the morally right action is the one that produces to greatest aggregate level of happiness and well being for affected individuals
It arose to counter ethical philosophies rooted in religious and culturally pre-determined morals based on doctrine
For every activity, if we could calculate the total benefits and cost of those benefits, we would choose the activity that generates the greatest benefits
What was the outcome of the Cow Example in the Shared Grass Commons?
People act in their best self interest to make the most profit for themselves, even if it means reducing the profit of others (Homo Economicus)
Only until the point where it is no longer profitable to buy another cow will people stop purchasing cows to make money
Collective Action Problems* (Social Dilemma)
Situations in which the rational self-interested behavior of the individual decision makers lead to suboptimal outcomes in terms of total utility (total happiness & well being - total profit of the farmers)
Another example of this is littering; people must take extra effort to throw out their trash, so they are better off by littering, BUT society is worse off
Negative Externality*
A negative externality occurs when a decision causes costs to stakeholders (people or groups) other than those involved in making the decision
In many cases, these are folks engaged in production, trading, and consumption of goods and services
Neither the producer or the consumer experience the cost
Positive Externality*
When benefits in a production-consumption relationship are experienced by a third-party, with no input on the decision
Prisoners Dilemma
When the prisoners cannot communicate with another they are heavily incentivized to turn against one another resulting in a suboptimal outcome (for the prisoners)
When they can communicate they have an incentive to work collaboratively for the best possible outcome
Collective Action Institutions
In the real world, people acting in their own self interest act very differently then when they can communicate with others and defend their own interests
They can institute (make) a collective agreement as opposed to a competitive market-based (antagonistic) one
Example: Montreal Protocol, where people worked together to achieve a healthier environment in the future
Institutions
The INSTRUCTION: what is allowed, not allowed and preferred/optimal
- This can include a number of conditions, making it very complex
- Consider the elderly lady example from Dr. Summers’ time in Malawi
The INCENTIVE: reward & punishment, some form of motivation that influences behavior. Incentives change the cost/benefit equation for the part of our brain that works like Homo Economicus
Joseph E. Stigletz claim on externalities and free markets
When there are externalities, for which those people affecting others do not pay, markets will not work well
Rules (Formal Institutions)
Formal instructions and incentives devised by groups that influence behavior of group members
Punishment and Rewards: raises, taxes, jail, subsidies
Laws, contracts, regulations
How do traffic intersections demonstrate how Homo Economicus operates in a collective institutional agreement*?
It may be easier for an individual to run a red light to get to his destination faster, but if everyone else does this then it would be chaotic and dangerous.
Thus, self-interested individuals are better off by following traffic guidelines
How do traffic intersections demonstrate how Homo Economicus operates in a collective institutional agreement*?
It may be easier for an individual to run a red light to get to his destination faster, but if everyone else does this then it would be chaotic and dangerous.
Thus, self-interested individuals are better off by following traffic guidelines
