Societies: facts & challenges samenvatting

Societies: facts and challenges
Inleiding

Talking about policy​ 1


Talking about policy
-​ Positive: how is the reality?
-​ Normative: how should things be?
-​ Correlation: statistical association between variables
-​ Causation: change in one variable causes a change in another variable
-​ Correlation does not imply causation
→ A third (confounding) variable may have an effect on both variables
-​ E.g. ice cream sales and sweating are correlated (hot temperatures affects
both variables separately)
→ Reverse causality
-​ E.g. poverty and low self-esteem are correlated (does poverty cause low
self-esteem or vice versa?)
-​ Formulating policy recommendations and policy advice
-​ Requires a good understanding of the society
-​ In particular of the causal mechanisms between the variables of interest
(which may be complex (e.g. when there is a causal web))
-​ Are conditional on a normative position (which society do we want?) and we
may disagree on our normative position




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, When markets fail
Societies: facts & challenges

Intro​ 1
Central questions​ 1
Librarian ideal​ 1
Benchmark model​ 2
Invisible hand​ 2
Market failures​ 2
1: Rational individuals​ 2
2: Perfect information​ 3
3: Perfectly competitive​ 3
4: Complete markets​ 4
5: No public goods​ 4
6: No externalities​ 5
Overview​ 5
Social investment​ 5
Final reflections​ 6
Government failures​ 6
Social rights​ 6


Intro

Central questions
-​ Why don’t we leave everything to free exchange between families and firms on a
self-regulating market?
-​ Why do we need a government that modifies the market forces?
-​ Why do we need a welfare state?
-​ Arguments based on efficiency
-​ Arguments based on justice


Librarian ideal
-​ Libertarianism: political philosophy that takes liberty as a central value and argues
that government intervention is (morally) wrong
-​ Nozick: the nightwatchman state → a state with a self-regulating free market
in which the government only provides the public good “safety”
-​ Hayek: the goal of social justice (equality) will destroy liberty
→ Philosophical underpinnings of “Chicago School” economics → open market
​ (Free market with little government intervention is the best)
-​ Recent wave of libertarian ideas in politics



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, -​ But problem for social-economic scientist
-​ How would a society with a self-regulating market without a government look
like?
-​ How can we imagine such a counterfactual society?
-​ ≠ Liberalism: political philosophy that takes liberty as a central value and argues that
governments are a tool for ensuring these liberties


Benchmark model
-​ Model of a society that allows the study of a imaginary society
-​ It provides a simplified, idealized framework to analyze economic behavior
-​ We start from a benchmark model
-​ Not meant to be a realistic model
-​ Like a perfect vacuum in physics, …
-​ We make 6 assumptions in the benchmark model




Invisible hand
-​ “First Welfare Theorem. In the benchmark model, free exchange on a self-regulating
market leads to a Pareto efficient outcome”
-​ Pareto-efficient
-​ An assignment is Pareto efficient when it is impossible to make a Pareto
improvement
-​ After a Pareto improvement someone is better off and nobody is worse off
-​ It’s about not waiting, it’s not about fairness
-​ Why does free exchange lead to a Pareto improvement?
-​ Intuition: If both parties involved in the free exchange would not
benefit from it, they wouldn’t exchange
-​ Voluntary trade + no trade possible anymore → Pareto-efficient
-​ Is the benchmark model realistic?
-​ No, it is not very realistic, in reality there are market failures
-​ And that is one reason why we need a welfare state


Market failures
-​ When one of the requirements of the benchmark model is not completed


1: Rational individuals
-​ Be careful with the jargon


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, -​ Rational for an economist means: “consistent”
-​ Rational for other people means: “smart”
-​ Lessons from psychology and behavioural economics
-​ Real individuals are not always rational
-​ Strategies to change behaviour
-​ Framing changes how information is presented to influence choices
-​ Eg saying "90% success" instead of "10% failure"
-​ Nudging is a way of presenting choices that steers people toward
certain decisions without taking away freedom
-​ Eg putting healthy food at eye level
-​ Nudge decision making
-​ Governments can nudge individuals by thinking carefully about the
framing of decisions (the choice architecture)
-​ Place of chocolate in resto
-​ Organ donation
-​ Behavioural-insights-team in UK and many other countries
-​ Raises ethical questions: “Libertarian paternalism”
-​ Real individuals suffer from bounded will-power
-​ Eg Tomorrow I’ll start studying …


2: Perfect information
-​ In the benchmark model, individuals need perfect information about price and quality
-​ Prices are not always clear
-​ Quality is often not clear
-​ Buying a second car
-​ Buying bio-products
-​ We need to improve the information!
-​ Government regulates information on products
-​ European Union plays an important role


3: Perfectly competitive
-​ In a perfectly competitive market, there are many buyers and sellers, without market
power
-​ Buyers and sellers are price takers, taking the market price as given in deciding how
much to buy or sell
-​ That means:
-​ No monopoly → one seller
-​ No monopsony → one buyer
-​ No oligopoly → a few sellers
-​ Free entry in the market
-​ Increase the market power?
-​ Monopoly power of superstar-companies: Amazon, Google, Walmart, …
-​ They increase their market power constantly!
→ With more market power, they can set higher prices
​ → This leads to greater profits, but not higher salaries



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