Economic Applications - The Importance of Altruism and Other Non-egoistic Behaviour.

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Present aim standard
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Terms in this set (17)
Present aim standard
This is when a person is efficient in the pursuit of whatever aims they have at the moment of the action. No attempt here is made to explain behaviour, it can make no sense. E.g if someone wanted to drink petrol the present aim standard only judges if they do it efficiently.
Self interest standard
This is where it is assumed that at the outset that peoples motives are in agreement with their narrow material interests. However motives such as altruism, desire for justice etc are not considered.
What is the problem with the present-aim model?
It accepts all type of behaviour which is its biggest attraction but also its biggest flaw. Because this mean it explains nothing.
Why is there often conflict in the self-interest standards?
There can sometimes be conflict when people act to their wider variety of goals. E.g giving to charity or paying a waitress/waiter they will never see again or walking away from profitable transactions because the deal is "unfair".
How can we make better predictions about peoples behaviour?
When we take unselfish sources of motivation into account. This makes the model predict more accurately what behaviour will occur but this is not how individuals should behave.
What are the costs and benefits of voting and what would self-interest standards say the rational choice would be to vote?
The costs are the travel time to the polling station, the length of time queuing, knowing your single vote wont change the results (i.e there's not been an election on one vote since 1928). The benefits could be if that person feels as if it's their citizens right to vote. If this gives them utility that is higher than the costs then they should vote according to the self-interest standard. If not, they shouldn't vote.
Example: Linda does feel like it's their citizens right to vote, her utility function is given as:
U = 2M+100V
Where M is monetary value of annual consumption, V is 1 if she votes and 0 if she doesn't vote. Linda works at a job for £50per hour and would have to spend 30 minutes getting too and from the polling station, how long must the line be before she will deicide not to vote?
Need to find where the utility of working = utility gained from voting, at this level is the maximum time she is willing to take off of work to vote, getting the same utility.
Voting will always give her a Utility of 100

Working 30 minutes (no queue time) = 2x25+100x0 = 50 Utility

Working 1 hour (30 mins queue time) =
2x50+100x0 = 100 Utility

Working 1 hour 30 mins (1 hour queue time =
2x75+100x0 = 150 Utility

Utility of working equals the utility of voting where the queueing time is 30 minutes, this is her maximum queueing time as any longer queues than this will mean her utility gained from work will exceed her utility gained from voting.
What behaviour is not predicted by the self-interest model?
Couple who won the lottery in Scotland giving their money to charity. Mothers spending their income/consumption on their children.
Example: Consider a single mother earning £2000 per month, and assume the mother cares about her and her child's consumption, i.e she gets utility from both. What does her indifference curve look like? What happens when the state provide education?
Her indifference curves are negatively sloped, this shows opportunity cost, i.e if you want more of one good you need to give up some of the other. Her indifference curve also show MRS, so as she has more of one good she is willing to give up more of it to gain some of the other.
When the state provide education this is acting as a price change for her child's consumption. It is making consumption for her child cheaper. Let's say after the education she only needs to pay 80% of her consumption on her child than what she did before but gaining the same things. I.e the price of £1 of consumption on her child is now 80p. We can also model this the same way.
Image: Example: Consider a single mother earning £2000 per month, and assume the mother cares about her and her child's consumption, i.e she gets utility from both. What does her indifference curve look like? What happens when the state provide education?
What did economists find when looking at what explains acts of selflessness and generosity?
They found that it was actually hints of self-interest or other economic behaviours that caused selflessness behaviour, they were not because of pure selflessness.
What did research find about why people donate to charity?Example: An experiment was done where flyers were put on peoples door when a charity were going to come round to ask for donations so people could know when to be in. The opposite occurred, people deliberately left the house so they didn't have to feel the social pressure associated with not wanting to look selfish when asked for a small donations. It was found that people only donate to charity for three reasons: True altruism, because it makes them feel good about themselves or it's used as a signal to show how wealthy they are.According to the self interest model, say an allocator has £10 and is told to split it, if you accept the split you get the share, if you reject the split neither of you get the money. Say the allocated gives you 1p and keeps £9.99 himself, would you accept this?Yes - because according to the self interest model the 1p makes you better off, rejecting the offer would be making your self worse off.From the last allocation/receiver example, say you now care about fairness (any deviation out of 50/50 lowers your utility). What would change if you had an income of £2000 and were offered £2 out of the £10.This would increase your wealth to £2,002, so accepting the offer gives you slightly more wealth. However rejecting the offer which gives you and the allocator giver you higher utility then accepting the unfair deal. This means you are on a higher indifference curve not accepting the offer - even though you only have £2000. This shows people need to be compensated when accepting divisions that deviate from equality.If you care about fairness from both sides what does your indifference curve look like and how does this compare if you prefer uneven splits in your favour?If you like being fair in all occasions then your indifference curve will will be symmetric. If you like being fair until it's in your favour your indifference curves will rise more sharply when you move to the left (the side that has higher proportions in your favour) then when we move to the right.What happens to fairness after you reach a higher money offer?At some point, concerns about fairness are likely to give way because of the absolute gain. E.g if you were offered a 0.1 share of 10 million (i.e 1 million) you would accept the offer due to the absolute size of the value.What is the social phenomenon for fairness?In general people have a natural bias towards equal - or at least not too unequal - division. People will enforce fairness norms even when it's not in their direct interest to do so.What is the fundamental principle of bargaining theory?The party who needs the transaction the least is in the strongest position.