Comprehensive summary for Unit 4 in the Core Econ 'The Economy' textbook, used by universities such as UCL, Durham, Oxford, KCL, Warwick and many more. Notes include diagrams accompanied by explanations, definitions and an overall understanding of the unit broken down into each sub-section of the c...
Introduction
Combination of self-interest, a regard for the wellbeing of others and
appropriate institutions can yield desirable social outcomes when people
interact.
Game theory is a way of understanding how people interact based on the
constraints that limit their actions, their motives, and their beliefs about what
others will do.
‘Business as usual’- scenario where people are free to pursue their own self-
interest without taking adequate account of the effects of their actions on
others (i.e. future generations).
Climate change is an example of a social dilemma (outcome is inferior to one
that could have occurred if people had acted together).
I.e. overusing antibiotics for minor illnesses may help the sick person recover
more quickly, but creates antibiotic-resistant bacteria that have a much more
harmful effect on many others.
Tragedy of the commons
Garret Hardin (1968), article about social dilemmas called “The Tragedy of
the Commons’
He argued that resources that are not owned by anyone (common property)
are easily overexploited unless we control access in some way.
Altruism- the willingness to bear a cost in order to benefit somebody else.
Social dilemmas can be solved by altruistic self-sacrifice or government
policies for example, e.g. cod quotas, landfill tax reducing waste and increase
recycling.
Local communities can also create institutions to regulate behaviour
(irrigation communities use scarce water sparingly due to common respect).
Montreal Protocol implemented to phase out and eventually ban CFCs that
were destroying the ozone layer.
4.1 Social Interactions: Game theory
Self-interest can promote general wellbeing or lead to undesirable outcomes.
Strategic interaction- a social interaction in which the participants are aware
of the ways that their actions affect others.
Strategy- an action that a person takes when that person is aware of the
mutual dependence of the results for herself and for others.
Models of strategic interactions are called games
The players: who interacts with whom
The feasible strategies: which actions are open to the players
The information: what each player knows when making their decision
The payoffs: what the outcomes will be for each of the possible combinations
of actions; final utility the player obtains in the game as a consequence of all
the other players’ strategies.
To simplify the model we assume:
They will interact just once (one-shot game) and that they decide
simultaneously (the player doesn’t know what the other has decided).
Payoff matrix:
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