Unit 2: social interactions and economic outcomes

A situation where actions taken independently by self-interested individuals result in a socially suboptimal outcome.

By encouraging or enforcing actions that lead to better social outcomes.

Benefiting from the contributions of others to a cooperative project without contributing anything meaningful yourself.

Because individuals benefit without contributing, which can undermine cooperation and lead to a socially suboptimal outcome.

Zero.

Not contributing to a farm plot but receiving the same or greater benefits as those who contribute.

The overexploitation of common-pool resources when there is insufficient control over their use.

Resources that are freely available for people to use.

Individuals may use them in their own self-interest without considering the impact on others.

Sanctions, altruism, public policies, and institutions.

By placing penalties or restrictions on self-interested preferences and choices.

By encouraging individuals to act for the benefit of others and achieve a common good.

Taxes, charges, and quotas.

By regulating behaviour through informal social norms and community rules.

A Nobel Prize winner who worked on ways to avoid the tragedy of the commons.

The study of strategic interactions between players.

A social interaction in which participants are aware of how their actions affect others.

A model of players' strategic interactions.

Players, feasible strategies, information, and payoffs.

The individuals involved in an interaction.

The actions each player can take.

What each player knows when choosing their action.

The outcomes associated with every possible combination of actions.

An action that yields the highest payoff for a player, irrespective of what the other players do.

Individuals pursuing their own self-interest can produce a socially optimal outcome without communicating.

Adam Smith.

A good provided when one individual bears a cost to create something that benefits everyone.

They help researchers study preferences and identify solutions to social dilemmas.

People may not be completely honest, making accurate responses difficult to obtain.

What people actually do.

To be as realistic as possible while maintaining control over the conditions.

Decisions have consequences; instructions and rules are common to all subjects apart from the treatment; experiments can be replicated; and experimenters control for other possible explanations.

To make participants' choices meaningful.

To ensure that differences in behaviour are not caused by inconsistent instructions.

So their findings can be tested by repeating the experiment.

To establish whether differences in behaviour are due to differences in preferences rather than other factors.

They make it more likely that differences in behaviour result from differences in preferences rather than differences in the situation.

Players care only about their own payoffs, behaving as Homo economicus.

Nobody can make players pay for the consequences of their actions.

Preferences in which a person takes into account how their actions affect other people.

Survey questions, statistical studies of economic behaviour, laboratory experiments, and field experiments.

A willingness to help someone else at a cost to yourself.

A desire to help those who have acted well and harm those who have acted poorly.

A dislike of unequal outcomes, especially when others are better off than you, even if you benefit from the inequality.

Players receive a set amount of money, contribute some or all of it to a common pot, and the total is divided equally among everyone.

£20.

Between £0 and £20.

The total contributions are divided equally among all players.

It may initially encourage players to donate the maximum amount or a high amount.

Under the standard self-interested assumptions, a player can benefit from the shared pot without contributing their own money.

A situation in which every player is playing their best response to the strategies of all other players.

A game in which each side does best if the other side gives way.

Countries may prefer other countries to bear the costs of restricting emissions, creating a conflict over who should act.

By promoting sustainable consumer lifestyles, stimulating innovation and the diffusion of cleaner technologies, and sharing the costs of restrictions more evenly between countries.

They can reduce consumption patterns that contribute to environmental damage.

It can develop and spread cleaner technologies that reduce environmental harm.

To encourage cooperation by making the costs of reducing emissions more fairly distributed.