Outline

1. Outline 1. The Back of the Invisible Hand: Social Dilemmas 2.Market Failures a. Negative Externalities b. Public Goods Problems c. Information Asymmetry

2. 9:30am • High Score…perfect: 25.08 • Median Score: 20.82 or 83%...(B)

3. 11am • High score= 23.94 • Median score= 21.41 or 85% (B)

5. Bonus Points Opportunity • To earn a bonus point attend the event & type a paragraph connecting something from the event to a concept or idea that we’ve covered in this this class. • Perhaps you can use one of our concepts to explain some aspect of what you learned, or to raise a question about what was presented. • Examples of concepts you can use: exit, voice, human agency, collective action, free rider problem, invisible hand, laissez faire, free markets, sociological imagination, social structure, structuration, institutions, norms, etc. • 5 events…1 point per event…no limit…Up to 5 pts for assignment grade…

6. The “Invisible Hand” of the Market… • Smith argued that as if by magic…the “Invisible Hand” would coordinate things • “…the market will arrange for production of the goods that society wants, in the quantities that society wants- without anyone ever issuing an order of any kind.” • “The pressures of the marketplace direct the selfish activitiesof individuals as if by invisible hand into socially responsible paths.” • Laissez Faire • doctrine that government should limit itself to the maintenance of law and order (D)

7. Market Society… • New social relations will also generate many questions for modern society… • Is competition enough to hold society together? • Is it sometimes a problem for society if everyone does what is in their own individual self interest? • Can markets alone insure “liberty and justice for all…” • Are there certain things that should be removed from the market…that should not be bought and sold?

8. Russell Hardin: The “Back of the Invisible Hand…” • Are there situations where the pursuit self interest will lead to problems for society as a whole? • Hardin concludes…YES • Social dilemmas: • a situation that occurs when each person in a group pursues his or her own short-term self-interest and theresult is the creation of a problem for the larger group or society. (D) • Sometimes called collective action problems or prisoners' dilemma • Think… • “What would happen if everybody did what person or group X is doing”? • Note: the focus in on legal, not illegal activity • Not what would happen if everyone mugged other people…but what would happen if everyone cut across the ACN lawn…

9. Readings… • What did the people of Lake Wobegon have trouble creating?

10. Readings… • What did the people of Lake Wobegon have trouble creating? • “Living Flag” using red, white and blue hats…why the trouble?

11. Readings… • “Living Flag”…why the trouble? • “The Wobegonians face a collective action problem, albeit an unusual one. Each is tempted to go up on the roof…but if they all do that, the Flag unravels and there is anything to look at.” • Social dilemmas: • a situation that occurs when each person in a group pursues his or her own short-term self-interest and the result is the creation of a problem for the larger group or society.(D)

12. Social Dilemmas are pervasive in society… • Tragedy of the Commons • These situations are everywhere…

13. Social Dilemma and Hunting…Fishing • Social dilemmas: • a situation that occurs when each person in a group pursues his or her own short-term self-interest and theresult is the creation of a problem for the larger group or society. (D)

14. Social Dilemma • situation that occurs when each person in a group pursues his or her own short-term self-interest and theresult is the creation of a problem for the larger group or society. (D) • “Widespread illegal and unregulated fishing has pushed tuna stocks near to utter destruction. According to the United Nations' Food and Agriculture Organisation, the global tuna haul increased steadily from 200,000 tonnes in the early 1950s to peak at 4.3m tonnes in 2003. Catches are now falling and prices rising—thanks largely to an insatiable demand for tuna, canned and raw, from health-conscious Americans and Europeans, and now from affluent Chinese as well. Meanwhile, as tuna prices soar, more fishing vessels put to sea.”-The Economist (1/27/07)

15. Social Dilemma in the Economy

16. When the Invisible Hand Fails In the Economy… • What we just considered is called a particular type of Social Dilemma called a… • Market Failures (D) • When social actors pursuing their own self interest in the market generate outcomes that are generally undesirable. • We will explore 3 Common types of Market Failures • Negative Externalities • Public Good Problems • Information Asymmetry

17. Cover the World…Social Structure, Free Markets and Behavior • Sherwin just finished reading Adam Smith and decided to borrow money from investors to open up a paint factory. He found a nice parcel of land on a river and started to manufacture paint. During the production process, Sherwin creates hazardous waste. Lots of it. What to do? He can discharge the waste into the river at no cost. This is what all the other paint companies do. There are no laws against this so he doesn’t have to worry about criminal charges. Another option is to pay someone to haul this waste away to be treated at the cost of $1000 per barrel. Sherwin’s accountants advise him that the costs associated with treatment will significantly increase his costs. He’ll need to charge $50 a gallon in order to maintain a profit rate acceptable to his Wall Street investors. His competition, which is dumping in the river, will be able to charge only $20. Sherwin’s Wall Street investors have warned him that if his profits are not adequate, they will cease to back him. This will mean financial ruin for Sherwin and his family. 1) What should Sherwin do with his waste? How is the social structure, in this case the existence of a free market, shaping his behavior? 2) What risk does Sherwin run if he chooses to take the high road and not pursue his short term self interest?

18. Another angle… • Your home is located on a river from which you and your neighbors draw your drinking water. Neighborhood kids regularly swim in the river, and parents often fish to provide meals for their families. Sherwin Paints buys 10 acres of land one mile upstream from your neighborhood and sets up a paint factory. During the manufacturing process, hazardous waste is created and Sherwin Paints simply dumps it in the river. This is not against the law, but none-the-less you and your neighbors are not happy. 3) Who is bearing the costs of Sherwin’s method of waste disposal? Be specific about the costs being incurred by others? 4) Is Sherwin Paints doing something wrong, or are they just doing what Adam Smith suggests they do: pursuing their own self interest? 5) Should Sherwin Paints be allowed to dispose of its waste this way? If so, why? If not, why…and what should be done?

19. The Paint Factory situation is one Type of Market Failure… • Negative Externalities • When the pursuit of individual self interest leads to discrepancy between private gains and social costs(D) • Sometimes called (Spillover or Neighborhood effect) • Some individual or firm benefits without paying for the true costs of their activity, or by imposing costs on others without compensation • “The cost that gets lost” • Note examples

20. My Pants and River Water • Jeans and Negative Externalities • Note Clip

21. Ryan Massey, 7, shows his caps. Dentists near Charleston, W.Va., say pollutants in drinking water have damaged residents’ teeth. Nationwide, polluters have violated the Clean Water Act more than 500,000 times (NYT 9/13/09)

23. Negative Externality • E.P.A. Identifies 243 Counties That Fail Federal Air Standards • Counties that are home to nearly 100 million people appear to fail federal air standards because of microscopic soot from diesel-burning trucks, power plants and other sources, the Environmental Protection Agency said on Tuesday. • He said that each year soot-filled air caused 15,000 premature deaths, 95,000 cases of chronic or acute bronchitis and thousands of hospital admissions because of respiratory or cardiovascular illnesses.

24. Negative Externalitly • Negative Externalities • When the pursuit of individual self interest leads to discrepancy between private gains and social costs (D)

25. Negative Externality • Negative Externalities • When the pursuit of individual self interest leads to discrepancy between private gains and social costs (D)

26. This situation is one Type of Market Failure… • Negative Externalities • When the pursuit of individual self interest leads to discrepancy between private gains and social costs (D) • Sometimes called (Spillover or Neighborhood effect) • Some individual or firm benefits without paying for the true costs of their activity, or by imposing costs on others without compensation • “The cost that gest lost” • How can society address such situations?

27. Society can address Negative Externalities in a variety of ways… • Markets…let people pursue their self interest and just wait for things work themselves out… laissez faire. • Consumers choose other paints that are non-polluting; Sherwin adjusts • Norms…try to develop normative constraints • Firm’s commitment to the community or earth prevents it from polluting • Institutional Rules and Regulation…laws with sanctions or inducements • Clean Water Act; Carbon Tax to reduce climate change; PA and new mercury rules (note next slide);

29. Society can address Negative Externalities in a variety of ways… • Markets…let people pursue their self interest and just wait for things work themselves out… laissez faire. • Consumers choose other paints that are non-polluting; Sherwin adjusts • Norms…try to develop normative constraints • Firm’s commitment to the community or earth prevents it from polluting • Institutional Rules and Regulation…laws with sanctions or inducements • Clean Water Act; PA and new mercury rules (note next slide); Carbon Tax. • Markets and Institutional Rules?…Inducements like cap and trade • Each company gets 1000 pollution credits. If only use 800, they can sell the remaining 200

30. Sometimes we don’t address…Negative Externalities & Public Health • The U.S. Environmental Protection Agency has developed benchmarks for "safe" concentrations of toxics in air, levels at which one person in one million is at risk of developing cancer. Key represents the risk factor for a combination of 31 toxics as a multiple of EPA's safe level (e.g. darkest shade indicates level more than 400 times EPA's safe concentrations).

31. Social Dilemmas, Negative Externalities, Pollution and You… • Scorecard.Org • Scorecard's Data Sources Scorecard integrates over 400 scientific and governmental databases to generate its customized profiles of local environmental quality and toxic chemicals. • Environmental Defense launched Scorecard on April 22, 1998 as a free public-information service Early in 2005, Environmental Defense decided to transfer our ownership of Scorecard to another nonprofit. After discussions with many groups, we selected Green Media Toolshed as Scorecard's new owner

32. Negative Externalities…Sometimes we don’t address them… • This is the greatest market failure the world has seen. It is an externality that goes beyond those of ordinary congestion or pollution, although many of the same economic principles apply for its analysis. • Stern Review on the Economics of Climate Change released by the British Governement in 2006 • Hypoxia can cause fish to leave the area and can cause stress or death to bottom dwelling organisms that can’t move out of the hypoxic zone. Hypoxia is believed to be caused primarily by excess nutrients delivered from the Mississippi River in combination with seasonal stratification of Gulf waters • US Department of the Interior

33. Another type of market failure… • Self interested actors in a free market often fail to adequately supply Public Goods (D): • things that convey a large or small benefit to the community, butwhich are not adequately provided by individuals pursuing their own self interest. • Lampposts, playgrounds, park benches, roads, lighthouses, snow plowing, libraries • Why does make sense for Trump to put up a Hotel in AC…but not to put up a Lighthouse? • How does society address the failure of self interested actors in market society to provide these things?

34. Public Goods • How does society address the failure of self interested actors in market society to provide these things? • Markets…let people pursue self interest and wait for someone to build a public park, a lighthouse or a lamppost… laissez faire • Norms…try to develop normative mechanisms…we’ll volunteer to build lamposts because we need them… • Institutional Rules and Regulation…laws with sanctions or inducements…taxes so government can put up lampposts…

35. Another type of market failure…

38. When the Invisible Hand Fails In the Economy… • What we just considered is called a particular type of Social Dilemma called a… • Market Failures (D) • When social actors pursuing their own self interest in the market generate outcomes that are generally undesirable. • We will explore 3 Common types of Market Failures • Negative Externalities • Public Good Problems • Information Asymmetry

39. Another type of market failure… • What is happening in these situations? • What are the self interested/selfish people interacting in the free market doing that is creating a problem for soicety? • Why do we hate used car salesman?

40. Another type of market failure • Information asymmetry (D) • One party to a transaction has better information than another party • Used car salesman just lie • Birth control vendors just lie • Wall Street…lack of trust between financial institutions…who holds bad debt…who doesn’t • How does society address? • Same ways as before… • Let the self interest play itself out via the market; institutional rules (lemon laws, FDA), norms (do the right thing)…or we don’t…

41. Russell Hardin: The “Back of the Invisible Hand…” • Are there situations where the pursuit self interest will lead to problems for society as a whole? • Hardin concludes…YES • Social dilemmas: • a situation that occurs when each person in a group pursues his or her own short-term self-interest and theresult is the creation of a problem for the larger group or society. (D) • Market Failures (D) • When social actors pursuing their own self interest in the market generate outcomes that are generally undesirable. • Common types of Market Failures • Negative Externalities • Public Good Problems • Information Asymmetry

42. Self Interest, Institutions and Values • Social dilemmas • a situation that occurs when each person in a group pursues his or her own short-term self-interest and theresult is the creation of a problem for the larger group or society. (D) • Pollution, lampposts and snake oil…what to do? • Reasonable people will reasonably disagree on how to solve social dilemmas • Markets, Norms and Institutional rules… what is the right mix? • Pay attention to the debate on climate change… • Your job…once again…is to spend time in college trying to develop your understanding of these issues and developing your perspective

43. Next… • Durkeim and Derber