UNIT 3: NOTES
04 January 2020 23:37
WHICH ECONOMIC OUTCOMES ARE DESIRABLE?
HOW CAN POLICIES HELP US ACHIEVE THESE OUTCOMES?
How can public policies help to improve economic outcomes?
• Collect the facts
○ Helps to allow ALLOCATION: who does and gets what
• Evaluate the allocation, to ensure that nothing is wasted
○ Is the allocation is efficient- making some better off without making others worse off
○ Is the allocation fair? (Very subjective)
Efficiency: is there a technically feasible alternative which allows some to be better off, without
making others worse off?
Fairness: subjective to one's opinion and thoughts on justice
Social preferences in the ultimatum game
A responder cares only about own payoffs will accept any positive offer, because it is better than
nothing
A responder who thinks that the proposers offer has violated a social norm of fairness can choose to
sacrifice the payoff to punish the proposer
EVALUATION
If the responder rejects- it is an inefficient outcome as you are wasting money
If the responder accepts- it is fair because both have agreed and received their allocation
Dictator game: the responder must accept any offer that you propose- efficient, but not fair because
it is not voluntary
There will be trade-offs between efficiency and fairness
Offers are consistent with social preferences, but also with expected payoff maximisation.
Pareto efficiency- the allocation of resources so that nobody can be made better off without making
someone worse off
Pareto criterion- helps us to judge efficiency when comparing allocations, says nothing about
fairness
An unequal distribution of food can be pareto efficient, as long as all the food is consumed.
DEFINING FAIRNESS
• Allocations can be judged unfair because of;
○ How unequal they are: In terms of income, subjective wellbeing or the distribution of
wealth. These are substantive judgements of fairness- based on the characteristics of
the allocations itself.
○ How the inequalities came about; procedural judgements of fairness
PROCEDURAL JUDGEMENTS OF FAIRNESS
• Voluntary exchange of private property
• acquired by legitimate means
• Deservingness
• Equal opportunity for economic advantage
Rawlsian Veil of Ignorance: the solution to allocation
"Fairness applies to all people"
- Evaluate the constitution, laws, inheritance practices and other institutions of a society as an
impartial outsider.
Economic Principles Page 1
04 January 2020 23:37
WHICH ECONOMIC OUTCOMES ARE DESIRABLE?
HOW CAN POLICIES HELP US ACHIEVE THESE OUTCOMES?
How can public policies help to improve economic outcomes?
• Collect the facts
○ Helps to allow ALLOCATION: who does and gets what
• Evaluate the allocation, to ensure that nothing is wasted
○ Is the allocation is efficient- making some better off without making others worse off
○ Is the allocation fair? (Very subjective)
Efficiency: is there a technically feasible alternative which allows some to be better off, without
making others worse off?
Fairness: subjective to one's opinion and thoughts on justice
Social preferences in the ultimatum game
A responder cares only about own payoffs will accept any positive offer, because it is better than
nothing
A responder who thinks that the proposers offer has violated a social norm of fairness can choose to
sacrifice the payoff to punish the proposer
EVALUATION
If the responder rejects- it is an inefficient outcome as you are wasting money
If the responder accepts- it is fair because both have agreed and received their allocation
Dictator game: the responder must accept any offer that you propose- efficient, but not fair because
it is not voluntary
There will be trade-offs between efficiency and fairness
Offers are consistent with social preferences, but also with expected payoff maximisation.
Pareto efficiency- the allocation of resources so that nobody can be made better off without making
someone worse off
Pareto criterion- helps us to judge efficiency when comparing allocations, says nothing about
fairness
An unequal distribution of food can be pareto efficient, as long as all the food is consumed.
DEFINING FAIRNESS
• Allocations can be judged unfair because of;
○ How unequal they are: In terms of income, subjective wellbeing or the distribution of
wealth. These are substantive judgements of fairness- based on the characteristics of
the allocations itself.
○ How the inequalities came about; procedural judgements of fairness
PROCEDURAL JUDGEMENTS OF FAIRNESS
• Voluntary exchange of private property
• acquired by legitimate means
• Deservingness
• Equal opportunity for economic advantage
Rawlsian Veil of Ignorance: the solution to allocation
"Fairness applies to all people"
- Evaluate the constitution, laws, inheritance practices and other institutions of a society as an
impartial outsider.
Economic Principles Page 1
