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Economic Category: Welfare Economics: Allocative Efficiency, Externalities, Fairness, Altruism

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Welfare Economics: Allocative Efficiency, Externalities, Fairness, Altruism - Article

1. David Ricardo

David Ricardo (1772-1823) was one of the greatest theoretical economists of all time. This article describes Ricardo's life and his contributions to the economic community, including the theory of rent and the concept of comparative advantage. [Details...]

2. From GATT to WTO: The Evolution of an Obscure Agency to One Perceived as Obstructing Democracy

In the 1940s, working with the British government, the United States developed two innovations to expand and govern trade among nations. These mechanisms were called the General Agreement on Tariffs and Trade (GATT) and the ITO (International Trade Organization). This articles explains those mechanisms as well as the evolution of the World Trade Organization (WTO). [Details...]

3. History of Property Taxes in the United States

The growth of the property tax in America was closely related to economic and political conditions on the frontier. This article describes how in pre-commercial agricultural areas the property tax was a feasible source of local government revenue and equal taxation of wealth was consistent with the prevailing equalitarian ideology. [Details...]

4. Hours of Work in U.S. History

This article presents estimates of the length of the historical workweek in the U.S., describes the history of the shorter-hours "movement," and examines the forces that drove the workweek's decline over time. [Details...]

5. Negative Externalities

Article explaining the basics of negative production and consumption externalities. [Details...]

6. Slavery in the United States

This article examines slavery in the United States by discussing the spread of slavery in the U.S., the insitutional framework, the legal status of slaves and blacks, the rights and responsibilities of slave masters, markets and prices, and profitibality, efficiency, and exploitation. [Details...]

7. Smoot-Hawley Tariff

The Smoot-Hawley Tariff of 1930 was the subject of enormous controversy at the time of its passage and remains one of the most notorious pieces of legislation in the history of the United States. This article explains why it caused controversy and is still referred to today. [Details...]

8. The National Recovery Administration

This article outlines the history of the National Recovery Administration, one of the most important and controversial agencies in Roosevelt's New Deal. It discusses the agency's "codes of fair competition" under which antitrust law exemptions could be granted in exchange for adoption of minimum wages, problems some industries encountered in their subsequent attempts to fix prices under the codes, and the macroeconomic effects of the program. [Details...]

9. The Paretian System - Efficiency

This article covers Pareto-Optimality and The Fundamental Welfare Theorems. [Details...]

10. The Paretian System - Social Welfare

This article covers The Social Optimum, The New Welfare Economics, Welfare Comparisons, and Bergson-Samuelson Social Welfare Functions. [Details...]

11. The Works Progress Administration

This article begins with the Great Depression and the New Deal, discusses WPA projects and procedures and the distribution of WPA funds. [Details...]

12. Usury

The question of when and if money can be lent at interest for a guaranteed return is one of the oldest moral and economic problems in Western Civilization. This article describes how by the early modern period the concept of usury began to be secularized, but the issue of what usury is and when it occurs is still causing disputes in modern legal and theological systems. [Details...]

13. Workers' Compensation

This article discusses the origins of worker's compensation and trends in worker's compensation over the past century. [Details...]

Welfare Economics: Allocative Efficiency, Externalities, Fairness, Altruism - Interactive Tutorial

14. Credibility of Economic Policy

This Learning Module will introduce you to the issue of economic policy credibility. Using a simple formal model, you can see how differences in public beliefs can cause the same policy action to produce different outcomes. For an analytical framework to evaluate public beliefs, examine six concepts relating to the credibility of economic policy. For real world experience, there are case summaries for you to consider. [Details...]

Welfare Economics: Allocative Efficiency, Externalities, Fairness, Altruism - Experiment Software

15. Common Pool Resource Game

This program sets up a multi-person game in which each person chooses an "effort" that represents a resource extraction activity (e.g. fishing). The resource is taken from a common pool in the sense that a person's share of the harvest equals their share of the total effort. [Details...]

16. Principal/Agent Game

This program runs a set of "Principal/Agent" games. The first mover (employer) makes a contract offer, and the second movers (worker) chooses whether to accept the contract. A worker who accepts a contract then chooses an effort level, which is costly to the worker but which benefits the employer. The possible contracts include fixed wage payments, along with possible ex post bonuses, monitoring, penalties, and/or profit sharing. If the contract only specifies a required fixed wage and an optional bonus, then the Nash equilibrium for selfish preferences in a one-shot game is to offer the minimum possible effort, since the wage is paid irrespective of effort. Efforts may be higher with fixed matchings or if participants are concerned with fairness and reciprocity. A number of contract options based (based on penalties and rewards) are also available. The game highlights issues of contract incentives, reciprocity, and strategy. [Details...]

17. Reciprocity Game

This program runs a set of "reciprocity" games. The first mover (employer) in each group makes a wage offer, and the second movers (workers) choose effort levels, which are costly to the workers but which benefit the employer. The Nash equilibrium for selfish preferences in a one-shot game is to offer the minimum possible effort, since the wage is paid irrespective of effort. Efforts may be higher with fixed matchings, but even then, increases in the number of workers per employer tend to increase the incentive that workers have to "free ride" on others' efforts. The game highlights issues of reciprocity and strategy. [Details...]

18. Room Allocation Game

This program sets up a three-person game for the allocation of three prizes among three individuals via an auction-like bidding process. This experiment is motivated by the problem of prospective roommates who must decide which person is assigned to each bedroom in a jointly rented house, and how much of the rent must be paid by each. [Details...]

19. Trust Game

This program runs a set of two-person "trust games". The first mover decides how much money to pass to the second mover. All money passed is increased by a factor, M > 1, and the second mover then decides how much of this to return to the first mover. The Nash equilibrium for selfish preferences is to pass nothing, since a self-interested person would return nothing in the final stage. The game highlights issues of reciprocity and strategy. [Details...]

20. Ultimatum/Dictator Bargaining Game

This program runs two-person, bargaining game. In the Dictator version, one person simply decides unilaterally how to split a fixed amount of money. In the Ultimatum version, the proposer makes an offer of how to split the money, which the responder either accepts or rejects. An acceptance implements the proposed split, and a rejection results in zero earnings for both. The game setup also allows a squish option, in which case the response to a proposal is a number on the unit interval, where 1 is full acceptance, 0 is rejection, and any fraction is a partial rejection that "squishes" both of the proposed payoffs down to that fraction of their original levels. The game highlights issues of fairness, equity, reciprocity, and strategy. [Details...]

Welfare Economics: Allocative Efficiency, Externalities, Fairness, Altruism - Web Site

21. Enterprise Restructuring in the former Soviet Union

Citizens of the countries of the former Soviet Union (FSU) have recognized the potential benefits, observed in many different cultures and societies around the world, of private, market-driven enterprises. For more than half a century enterprises in the FSU have been subject to comprehensive state ownership and central planning. Prices and financing were typically of little concern to enterprise management, while workers did not have to worry about job security and received a wide range of social benefits through enterprises. While moving toward private, market-driven enterprises offers great promise for an improved standard of living for the average person, such a transition represents a fundamental social, psychological, and economic challenge. [Details...]

22. Mexican Economic Crisis, December 1994

This site explores the Mexican Economic Crisis through reviews and summaries, links to facts and background, and displaying statistical tables. [Details...]

23. Unemployment in Eastern and Central Europe

Unemployment, once unknown and illegal in the formerly communist regimes in eastern and central Europe, has become a significant social and economic phenomenon. The rise in unemployment rates has been large but varied across countries. The transition from centrally planned economies to market-oriented economies has produced significant reductions in employment in the state sector as consumer-driven incentives begin to influence industrial structure. Reductions in employment in the state sector were partially offset by reductions in labor force particpation. Differences in the decline in labor force participation among countries led to significant differences in the relationship between unemployment growth and contraction in employment. However, the decline in labor force participation seems to be concentrated in the early stages of the transition, and in the future declining labor force participation is not likely to play as significant a role in dampening the growth of unemployment. [Details...]

Welfare Economics: Allocative Efficiency, Externalities, Fairness, Altruism - Non-computerized experiment

24. A Bargaining Experiment to Motivate Discussion on Fairness

The author presents a classroom version of the popular research game called the Ultimatum Game. Researchers are placing growing importance on how fairness affects behavior, and this experiment provides a useful, fun, and engaging way in which a day or two of class time can be spent on the topic. The appendix contains all of the materials necessary to conduct this experiment, and the experiment can highlight several items of interest for the instructor. First, different individuals place different subjective weights on concerns for fairness versus money. Second, theories that incorporate concerns for fairness into agents' preferences can often explain behavior better than those that do not. Finally, when it is relatively cheap to purchase fairness (or equality) individuals purchase more of it. The classroom results can motivate discussion of a downward sloping demand curve for fairness. [Details...]

25. A Simple Investment Game Experiment for the Classroom

We present a simple way of carrying out the Investment Game, introduced by Berg, Dickhaut and McCabe (1995) inside the classroom for instructional purposes. This game is a handy way of illustrating the principle of backward induction in sequential move games. In a slight deviation from the original design we allow each subject to play both as a Sender as well as a Receiver. [Details...]

26. An Experiment on Externality Rights

This experiment is simple and fun, but I have found it useful to make some Law and Economics points about externality rights and efficient specification of right, following Ronald Coase and Richard Posner. [Details...]

27. Economic Efficiency and the Role of Prices: Market Sessions for Use in Classrooms

In order to give economics students a better intuition for how an economy or a market works, exercises can be introduced directly into the classroom. The following three classroom games are designed to maintain student interest, promote involvement, and provide a way for the instructor to control the parameters of the game so that the outcomes directly relate to the basic concepts and lessons offered in the text. The concepts illustrated by the sessions are 1) the greater efficiency of resource allocation in a market economy as compared to a command economy, 2) the role of information in the efficient allocation of resources, and 3) that institutions matter. [Details...]

28. Equity and Efficiency in a Game

The classroom exercise described below is a fun way to illustrate equity-efficiency tradeoffs, the frustration associated with relative inequality, and the interdependence of decisions among members and institutions in society. It was designed for a principles of microeconomics course of about twenty to thirty students. [Details...]

29. How Fairness Can Affect Voluntary Contributions to Public Goods

Contributions to public goods have been studied experimentally by economists and sociologists for a long time. The main result is that subjects free ride, but not as much as game theory predicts. The standard game is as follows. Each member of a group of n players receives an endowment zi. Each player has to choose how much to invest in a public good. The experimenter collects the contributions, multiplies the total by some amount (a) and divides equally the product among the players. The game-theoretic prediction is that no one contributes as long as a/n<1. Experimental results showed that this prediction is not verified: subjects contribute around 40% of their endowments (see Ledyard, 1995, for a survey). The main studies focused on the rate of return of the public good, the number of players, the introduction of thresholds, institutional rules, etc. Some of them also examined subjects' preferences: comparative studies have been done on gender or education (for instance, Brown-Kruse and Hummels, 1992). In this paper, we propose to test the influence of fairness on subjects' decisions. Previous studies used questionnaires to discriminate among participants those who have stronger senses of fairness. Here, we study it directly in games with unfair redistribution, i.e., with payoffs and endowments heterogeneity. Our experiment, easy to reproduce in the classroom, shows that contribution rates differ largely and proves that fairness play a role in subjects' decisions to contribute. [Details...]

30. The Distributive Justice Game

The Distributive Justice Game asks students to draft a social contract while in a state that roughly mimics Rawls' original position. I begin by limiting the amount of chairs, time, pencils, and textbooks that the class will be able to use during an upcoming extra credit quiz. I announce that I intend to allocate these resources among the students according to such attributes as sex, race, and wealth. I then divide the students into groups and invite them, if they wish, to redistribute these resources among themselves. There's a catch, though. To give the game a Rawlsian twist, I announce that I will not allocate the quiz-taking resources according to the students' existing attributes; instead, all students will be "reborn" just before the quiz and given new identities. Unsure of whether their new attributes will entitle them to a fair share of the quiz-taking resources, students often strive to redistribute them as equally as possible, even at the expense of efficiency. [Details...]

Welfare Economics: Allocative Efficiency, Externalities, Fairness, Altruism - Course lecture

31. Distributing Income

Lorenz curves, poverty, and government aid. [Details...]

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