But are we too generous with our trust? Recent developments in places as far-flung as Hungary and the Philippines remind us that there’s a second history, running parallel to improving approval ratings, of governments using crises to enhance and consolidate their power. It’s a darker history, and one we would do well learning from. Alas, there are concerning signs it’s set to repeat itself. Tailored to tyrants In many ways, the current moment is primed for exploitation. If health systems are to withstand COVID-19, it’s essential that strict restrictions are placed on public life, civil liberties reduced, and, to enforce it all, state power extended. In concert, this is music to the authoritarian’s ear; a description of an idealised society. It's a world in which power-grabs can be carried out publicly, legitimised by rousing cries of unity, and all anxious voices comforted by the knowledge that everything is in the ‘national interest’. It's, above all, an opportunity. Indeed, short of war, no other emergency comes close to matching the ubiquity of COVID-19’s fallout. Consider, for example, terrorism. Terrorist attacks can scar populations and cause great economic damage, but in scale, they pale in comparison. They tend only to hit a contained area which limits the economic impact, and, despite being designed to scare, the panic created is also less widespread. A pandemic, on the other hand, knows no boundaries, equalising the terror and economic damage it wreaks, the village dweller suffering in similar ways to the city-based socialite. And this is key: while fearing for health or financial well-being, people are at their most compliant, their most likely to surrender their freedom. What further sets COVID-19 apart is that the consensus response is to stay indoors. In other emergencies - during war, after a natural disaster, or following a terrorist attack - agency can be claimed by citizens, armies can be joined, humanitarian aid contributed, or marches defiantly attended. In stark contrast, under lock-down people are, by-and-large, left impotent, reliant on their leaders. Apart from online, there’s no means to congregate in protest, a Twitter storm the most threatening collective act. Few would say it packs the same punch. They've wasted little time Nowhere in Europe has this situation been more obviously seized than in Hungary, where an already strong governing hand looks now to have an unassailable grip. In response to the crisis, Prime Minister, Victor Orban, has passed legislation that has prorogued the legislature, permitting him to rule by decree, and suspended all elections and referenda. Most alarmingly, no sunset clause has been set. To say that Hungary is now a dictatorship is no exaggeration; it’s analytically accurate. With the last window dressings on his ‘illiberal’ democracy gone, Orban is now a dictator in the European Union. He can unilaterally change any existing Hungarian law and imprison people for spreading ‘false’ information, a phrase terrifyingly, and intentionally, vague, lending it a versatility that could easily be turned on political opposition. This is threatening a beleaguered EU already struggling to cope with COVID-19. For in truth, it has few options. Many point to Article 7, which if invoked would suspend Hungary’s EU membership. But for this to pass unanimity among the EU27 is required, and as has happened in the past, Poland will likely veto any moves against Hungary, leaving an impasse. There’s logic behind Poland’s support, too. Polish President, Andrzej Duda, is also looking to benefit from the current situation. Having hollowed out much of Polish democracy, the ruling party is now refusing to cancel the early May presidential election. With the country under lock-down, opposition parties are unable to effectively campaign, and one of the only remaining channels left in which to do so, television, is monopolised by Duda. There could also be a further motivation: polling shows that higher turnout would threaten Duda’s chances of victory. Insisting that it goes ahead in a moment that would significantly decrease turnout looks very much in his political interest. But these trends are far from exclusive to Europe. In Israel, disgraced Premier, Benjamin Netanyahu, has also spied an opportunity. Currently facing a range of criminal charges that include breach of trust, accepting bribes and fraud, he’s used the pandemic as a pretext to close the courts - postponing his own trial in the process - and suspend the Israeli Parliament, allowing him to lead without oversight. Prior to the crisis, his political career looked all but over; no longer. Turkmenistan, which still implausibly claims yet to have contracted one case, has banned the use of the word ‘coronavirus’. Its utterance now carries with it a hefty fine. In the Philippines, President, Rodrigo Duterte, much like Orban, has outlawed the distribution of ‘false’ information, his violent past making the vagaries around what constitutes ‘false’ incredibly worrying. And just this week, Hong Kong has been accused of using the crisis as cover to arrest pro-democracy candidates ahead of elections in September. The trend, like the virus, is dangerously pervasive. Post-COVID-19 Although difficult to imagine, doors will eventually reopen, and we will be freed from our current imprisonment. The question is: what kind of world will we find? It will be a different world, no doubt, one wracked by suffering, recession, and impoverishment; that, at least, seems assured. But what of freedom? Once the disease is contained will seized power be relinquished? Or will clenched fists remain clamped shut? These questions are not just for Hungarians, Israelis, and Filipinos, either. Time and again, history has shown how reluctant leaders, even of democracies, can be to lift a ‘state of emergency’ and return the powers they grant. France lived under such a state for two years between 2015-17, with many complaining of the undue power it afforded the government. As things return to normal, citizens must, wherever possible, hold their representatives to account. They have to be vigilant. The virus has already taken too many lives, we must do our utmost to ensure that it does not take our freedom too.
As the world is ravaged by COVID-19, governments everywhere are enjoying burgeoning support. A glance at approval ratings finds presidents, prime ministers, even autocrats, overwhelmingly popular, in some instances irrespective of their actual performance. Of course, this is unsurprising: there’s long been a history of populations coalescing around established leaders in times of crisis. Amid uncertainty, we find their increased visibility reassuring. Speaking to the nation they look competent and confident; we feel inclined to trust them, and more often than not, we do.
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The advantage of depicting an economy in this way is to allow comparisons of different allocations and to determine their relative efficiency. Consider the following example of an economy with two individuals, Adam and Eve, and two items, dates and milk. The total number of dates in the economy is represented by the horizontal length of the box; the total amount of milk is measured by its vertical length. In the bottom-left corner \(o\), Adam has nothing while Eve owns/consumes all of the dates and milk. In the opposite top-right corner \(o'\), Adam possesses everything in the economy while Eve has nothing. The indifference curves \(A_{1}\), \(A_{2}\) and \(A_{3}\) represent Adam’s preferences over dates and milk, with higher utility on \(A_{3}\) than \(A_{1}\); analogously, indifference curves \(E_{1}\), \(E_{2}\) and \(E_{3}\) represent Eve’s preferences over dates and milk, with higher utility on \(E_{3}\) than \(E_{1}\). Figure 1: Edgeworth Box example The points \(X_{1}\), \(X_{2}\) and \(X_{3}\) show three different allocations of dates and milk between Adam and Eve. At \(X_{1}\) Adam is on his indifference curve \(A_{1}\) while Eve is on her indifference curve \(E_{3}\). However this allocation is not Pareto-efficient because both Adam and Eve could be made better off (achieve higher utility) with another allocation anywhere within the grey shaded area bounded by indifference curves \(A_{1}\) and \(E_{3}\). In contrast, the allocation at \(X_{3}\) where indifference curves \(A_{3}\) and \(E_{1}\) touch tangentially is Pareto-efficient because neither Adam nor Eve can achieve higher utility through a different allocation without reducing the other’s utility. Note however that at \(X_{3}\) Adam has significantly more dates and milk than Eve while the converse is true at \(X_{1}\). The fact that \(X_{3}\) is an efficient allocation says nothing about its fairness. Indeed, a point closer to the middle of the Edgeworth box, such as the allocation at \(X_{2}\), may be deemed more equitable than either \(X_{1}\) or \(X_{3}\) as the dates and milk are more evenly spread between Adam and Eve. By reasoning similar to that at \(X_{1}\), the allocation at \(X_{2}\) is not Pareto-efficient; it can be improved upon without harming either individual in the economy. The set of Pareto-efficient allocations can be revealed in an Edgeworth box as a “contract curve” that runs between the origin corners (\(o\) and \(o'\)) through all of the points where indifference curves meet tangentially. This curve is depicted by the green line in Figure 2; every point on this line represents a Pareto efficient allocation where the indifference curves for both individuals are tangent to one another. Note that while each allocation on such a curve is efficient, it is not necessarily equitable! Figure 2: Contract curve depiction in an Edgeworth Box Further reading: The classic trade-off between efficiency and equity has long been a major point of contention in political economy. Koichi Tadenuma uses Edgeworth boxes to show how prioritising equity over efficiency can sometimes deliver more socially desirable outcomes, see his article, “Efficiency First or Equity First? Two Principles and Rationality of Social Choice” (Journal of Economic Theory, 2002). Good to know: Edgeworth boxes are a useful tool when considering the trade of two finite resources between two distinct economies. Utility in both economies can be shown to increase as trade allows the economies to achieve more efficient and equitable allocations of the resources than is possible in a state of autarky. Proponents of free trade may also argue that larger Edgeworth boxes can be achieved through exchange as the exploitation of each economy’s comparative advantage in production should lead to a greater overall availability of goods and services.
An Edgeworth box (named after Irish philosopher and economist Francis Ysidro Edgeworth, 1881) is a two-dimensional representation of a simple, closed economy consisting of two individuals and two items (or resources) that are finite in supply. Any feasible allocation of the items between the individuals is included as a dot in the box; the individuals’ preferences over the items are represented through indifference curves.
The application of this functional form in measuring production is owed to the mathematician Charles Cobb and the economist Paul Douglas, after whom it is named. They originally used it to consider the relative importance of the two main input factors, labor and capital, in manufacturing output in the USA from 1899 to 1922. The general form of a Cobb-Douglas production function for a set of \(n\) inputs is \[Y=f\left(x_{1},x_{2},...,x_{n}\right)=\gamma\prod^{n}_{i=1}x^{\alpha_{i}}_{i}\] In this formula \(Y\) stands for output (as measured by, for example, GDP), and \(x_{i}\) for input \(i\). Meanwhile \(\gamma\) and \(\alpha_{i}\) are parameters determining the overall efficiency of production and how output responds to changes in the input quantities. In their original model, Cobb and Douglas restrict the output-elasticity parameters \(\alpha_{1}\) and \(\alpha_{2}\) to the range \(\alpha_{i}\in\left(0,1\right)\) and to sum to one, which implies constant returns to scale. Reading the above equation might be challenging for new students of economics. For help interpreting economic formulae, see the linked article “A quick guide to math symbols in economics”. Reading this equation is straightforward once the symbols are all identified; the Cobb-Douglas function is the product of multiple xi (specifically n of these xi), each raised to the αi power, and the resulting product is multiplied by the parameter 𝛾. Applying Cobb and Douglas’s model to the production of a two-factor economy (using inputs x1 and x2) simplifies the above expression. The resulting function becomes \[Y=\gamma x^{\alpha_{1}}_{1}x^{1-\alpha_{1}}_{2}\] where \(x_{1}\) and \(x_{2}\) stand for labor and capital, respectively. Note that the two exponents simplify to α1 and (1 - α1) because Cobb and Douglas assumed they must add to one (again, showing constant returns to scale). Another common representation of this formula that macroeconomics students may see is: \begin{equation*}\mathit{Y} = \mathit{A}\mathit{L}^{\alpha}\mathit{K}^{\beta}\end{equation*} where L represents labor, K represents capital, 𝛼 and 𝛽 are efficiency parameters as above, and A represents productivity-enhancing technological progress (just as 𝛾 above). Taking the natural logarithm of both sides of the first equation yields \[\ln{Y}=\ln{\gamma}+\alpha_{1}\ln{x_{1}}+\left(1-\alpha_{1}\right)\ln{x_{2}}\] such that for data on output, labor and capital, the parameters \(\gamma\) and \(\alpha_{1}\) can be estimated using Ordinary Least Squares, a common method used in regression analysis. Based on their data, Cobb and Douglas found a value of 0.75 for \(\alpha_{1}\) in the US. This implies that labor accounted for three quarters of the value of US manufacturing output (capital accounting for the remaining quarter) from 1899 to 1922. Their estimate for the efficiency parameter \(\gamma\) is 1.01. Since it is greater than 1, this reflects the positive effects of "unobservable" forces (like technology growth) on production through the combination of labor and capital. The multiplicative nature of a Cobb-Douglas production function, assuming positive values for \(\alpha_{i}\), means that the inputs are complements in production. In the standard model of labor and capital, increasing the amount of capital increases production both directly and indirectly through its impact on the productivity of labor. Or, stated mathematically, the cross-partial derivative of production output \(Y\) with respect to labor \(x_{1}\) and capital \(x_{2}\) is positive. Furthermore, due to the assumption that \(\alpha_{i}\in\left(0,1\right)\), the second-order partial derivatives of production output with respect to labor and with respect to capital are both negative. This suggests diminishing marginal returns for each input. This means that simply adding either more labor or more capital (but not both) to the production process increases output, but at a diminishing rate. Additionally, the elasticity of substitution between the inputs is constant and equal to one due to the functional form. A two-input Cobb-Douglas production function can be represented graphically in the form of isoquants: combinations of both inputs for which the output is constant. There are four such isoquants in Figure 1 for the (constant) output levels \(\overline{Y_{1}}\), \(\overline{Y_{2}}\), \(\overline{Y_{3}}\) and \(\overline{Y_{4}}\). The further the isoquant from the origin, the greater the level of output \(\overline{Y_{4}}>\overline{Y_{3}}>\overline{Y_{2}}>\overline{Y_{1}}\). Which precise combination of the inputs \(x_{1}\) and \(x_{2}\) is optimal for production is determined by the budget available to the producer as well as the cost ratio of input \(x_{2}\) to input \(x_{1}\). These factors can be included in the graph in the form of an isocost line (see the article on elasticity of substitution). Figure 1: Cobb-Douglas production function isoquants Cobb and Douglas themselves acknowledged that their production function does not rest on solid theoretical foundations, nor should it be understood as a law of production. It merely represents a statistical approximation of the observed relationships between production inputs and output. Nevertheless, its simple mathematical properties are attractive to economists and have led to it becoming a standard model used in economic theory over the past century. Further reading For the background and an overview of the main properties of Cobb-Douglas production functions, see in particular sections 6, 7 and 8 of Cobb and Douglas’ original article, “A Theory of Production” (The American Economic Review, 1928). Good to know The Cobb-Douglas functional form is not only used in the theory of production but it has also become standard in microeconomic consumer theory. There it is applied as a utility function, where \(Y\) becomes \(U\) for utility. The \(x_{i}\) then represent items of consumption. When the utility function is maximized, subject to a budget constraint, the values for \(\alpha_{i}\) indicate how the individual will optimally distribute their budget among items.
A Cobb-Douglas production function models the relationship between output and production inputs (also known as factor inputs). It is used to calculate ratios of inputs to one another for efficient production, and to estimate technological change in production methods. It’s a commonly used economic model that is very flexible, and as such is often one of the first models students of macroeconomics will learn (though it’s also used in microeconomics, too).
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INOMICS is a member of the Amazon Associates affiliate program and the Apple affiliate program. This article contains affiliate links, which means we may earn money through any qualifying purchases made after you click through. However, this is not a sponsored post. Business Simulators 1. Capitalism This classic business simulation game and its well-reviewed sequel Capitalism II allow you to live out your wildest dream: running the most successful business in the world. As CEO, you’ll have to avoid bankruptcy, fight off competition, and make sure you don’t get bought out. But don’t expect this journey to be easy - Capitalism has been ranked as one of the most difficult games ever. While the game’s beginning is not the most realistic for most of us - you can start your journey with capital of two hundred million dollars if you want - it offers an insight into how one could start a new company, providing semi-real simulations of markets and the cutthroat world of business. At the game’s outset, you can either start totally from scratch or "inherit" a business such as an agricultural company. Typically, your goal will be to dominate a certain percentage of market share within a certain time period. An expansion named Capitalism Plus released in 1996, introduced random events such as riots and technological breakthroughs, making the already-complicated game even more difficult to play. So have fun failing at your first business - thankfully, at no risk whatsoever. 2. Virtonomics Virtonomics an economics video game that is used in schools and on university campuses to help students learn the ins and outs of business markets. Both entertaining and educational, this massively multiplayer online game is similar to Capitalism in that it simulates the processes of building a business in a competitive environment. With totally open-ended gameplay and the ability to play forever if you want to (though we don’t necessarily recommend that), the turn-based game allows players to compete against not only other players but also the computer. Further, you can pick whichever market you’d like: agriculture, retail, marketing, you name it. What better way to spend your time playing a game than improving your business acumen and learning something about economics at the same time? City Builders 3. Pharaoh The sequel to Sierra’s lauded Caesar, this game was a huge success, adding new features to Impressions Games’ intricate city-building interface. Here you take control of ancient Egyptian societies, attempting to keep your citizens happy while producing enough raw materials to trade and improve the conditions of your workers. Military battles are fought in real-time with the choice between archers, soldiers, and naval vessels, and many missions require the building of monuments including the fabled pyramid. Economists will be especially intrigued by the monetary system, which is pretty tough. You’re allowed to go into debt in order to build your city, but each year you remain in debt lowers your Kingdom Standing. If this rating becomes too low, the Pharaoh will send his troops to obliterate all of your hard work. Money can be made on certain levels by mining gold deposits, but these are often located on unfavorable terrain; if your city isn’t lucky enough to have these, you’ll have to create goods like beer and pottery, open up trade routes, and pray that droughts and floods don’t hinder your ability to sell your wares. Best of luck! 4. Cities: Skylines One of the most successful city building games ever, released to compete with SimCity (which bombed, leaving space for this game), Cities: Skylines introduced an intricate but simultaneously easy-to-understand concept of how to build a large city from just a small plot of land. You’ll start off with a small budget and a tiny plot, and have to expand into a village, a town, and a city. Your ultimate aim: create a metropolis the size of New York City. As you work your way through the game, you’ll unlock new buildings and features, as well as the ability to designate parts of the city as districts. Along the way you’ll have to invite workers and provide them with jobs, which then will give you revenue, with which you can improve the city, and so forth. The city eventually becomes very complex, with transport links operating from one end to the other, different road types to reduce noise pollution, the ability to force certain districts to only offer one kind of industry, and much more. Using your economic expertise (as well as architectural and design skills) you’ll be able to manage your city's finances, infrastructure, and economic planning, until your city runs like a well-oiled machine. Theme Park Managers 5. Theme Park World Following the success of Theme Park, Theme Park World lets you build your own - well - theme park. The player takes control of a relatively simple business model: expand the park, research new attractions, remain profitable, and win keys which open up new levels and rides. You’ll also have to hire staff to maintain the parks, including cleaners, mechanics, entertainers, and guards. All of these employees are important to keep visitors happy, prevent thefts and other crime, keep the park clean, and make sure none of the rides break down. Once you’ve made enough money, you can start to upgrade your rides and train your staff, making the latter more efficient, and the former more fun! Once you’ve done all that, and your coasters pay for themselves, use the in-game currency of Golden Tickets to jump down into first-person mode and walk around your own park, even going on some of the rides you’ve created yourself. 6. Roller Coaster Tycoon A PC classic, Roller Coaster Tycoon puts you in the shoes of a theme park designer tasked with saving a series of increasingly hopeless theme park businesses. Each level gives you a new park in a new area, a set of objectives for how to save the dying business, and a pat on the back, leaving you to figure out how best to save the business on your own. In order to succeed, you’ll have to manage the happiness of your guests, find out which rides suit their tastes the most, adjust ticket and concession prices, hire staff to maintain your properties, spend money transforming the landscape, place food stalls and rides in the best possible locations to encourage spending, balance your monthly budget, and more. Become profitable by each scenario’s deadline, and you’ll have succeeded in saving the park! Of course, there’s also a sandbox mode which lets you build your own park from scratch with no time limits or pressure, so it can be quite relaxing and fun to build your own dream park. While the game linked here is the original, the success of Roller Coaster Tycoon spawned many sequels and spin-offs in similar ventures, like Zoo Tycoon. Society-building Strategy Games 7. Civilization VI One of the most famous and widely loved strategy series of all time, Civ (as it’s commonly known) allows you to choose a historical leader, create a civilization and control it all the way from an early settlement to a highly developed, industrialized world power. Whether you choose to dominate the world through military might, technological or cultural superiority, or diplomatic acumen is up to you. While there’s a mode to play against the computer, you can also play against your mates, making it a fun, turn-based competitive game as well. Civ features multiple strategic layers to consider, such as militarism, scientific research, and politics, which creates complex and long-ended gameplay. You’ll have to deploy your economics knowledge to make sure your raw materials are used correctly, your neighbors are happy and will trade with you (or avoid declaring war on you), and you’re able to continue making improvements to your cities. Newer installments, such as 2016's Civilization VI and its expansion pack Gathering Storm from 2019, include features such as the introduction of natural disasters, as well as new leaders and civilizations to control. So head in, pick your civilization, and take over the world. Miscellaneous 8. Animal Crossing: New Horizon Perhaps not the first game you think of when it comes to economics, but the latest installment of the Animal Crossing series for the Nintendo Switch, New Horizons, is special for its in-game currency of Nook Miles and the ability to craft tools, pay off your home loan debt, and furniture. The basic concept of the game is that you purchase an island on which you create a community of anthropomorphic animals. You collect items and materials which you can craft into decorations and tools, and slowly build up the infrastructure of your little slice of the world to attract more denizens and build your own paradise. The latest installment allows multiple people to play together or simply visit each other’s islands, and includes new weather conditions, as well as seasons which adjust to which hemisphere the player is in. Part of a beloved series, the game has received overwhelmingly good reviews. So get to your island and start figuring out how you’re going to make enough money to craft those decorations! 9. Real-Time Strategy Classics While not for the faint of heart, real-time strategy (RTS) games are an interesting choice from an economic standpoint. In these types of games, players compete against the computer or each other to build a functioning wartime economy while doing battle. Economic growth and efficient allocation of resources are absolutely critical for success in an RTS. For example, in the sci-fi Starcraft II, players must balance two resources - minerals, which are widely available and easily mined, and gas, which is rarer and takes a longer time to mine. Minerals are used to build most structures and economic workers for your bases, which increase your income and allow you to grow your economy quickly. But, to research important upgrades and build advanced military units, gas is needed. Even in this simple framework, the best players are set apart by mastering the balance of how many workers to build while having enough military units to defend, how to allocate workers to each resource, and optimizing when to switch workers around among resources. Other popular RTS games, like the historically-inspired Age of Empires IV, include even more resources to manage: wood, gold, stone, and food. For even more complexity check out the fantasy setting of Warcraft III, which famously includes ongoing upkeep costs for your military, throwing even more consideration into a fast-paced game. 10. Kerbal Space Program Have you ever wanted to manage the funding, research and development, and general management of a space program? Are you willing to take responsibility for the lives of cute, enthusiastic alien astronauts (the titular Kerbals)? Look no further - Kerbal Space Program (KSP) is the game for you. KSP’s Career Mode is the biggest draw here for an economist. You must complete contracts to generate funds so that you can grow your space program, but funding isn’t the only resource to manage. Reputation increases the amount of contracts your program attracts, and the size of the rewards that come your way, allowing your program to grow more efficiently. “Science” points, meanwhile, increase your selection of rocket parts. Since you’re not only the program manager, but also the designer of all of your program’s spaceships, you’ll need plenty of science to ensure you have enough realistic parts (using physical statistics based on real life space programs and real physics to determine if your rockets succeed or explode catastrophically) to complete your missions. With all of these choices, we hope you find a video game with economics themes that scratches your gaming itch.
So you’ve decided it’s time to take a break from all the hard studying you’re doing during your economics Master’s or PhD program. Why not spend time playing a video game which will help you accrue business acumen, improve your real-world economics knowledge, or reflect economics concepts in its gameplay? Sound too good to be true? Thankfully, there are some games which offer just that.
Picture the scenario. You begin the day rolling out of bed in the afternoon, throwing on some casualwear, saying to yourself “today I will finish that, read this and write up this”. Three hours later, however, what has happened? Social media is updated with your latest thoughts, the coffee cup has been refilled twice, and the dusty bookshelf has been reorganised colour coded. Staring out the window with an empty notebook, you ask yourself, ‘where did I go wrong’? Don’t worry - we’ve all been there. Follow this step by step guide, and you’ll be a star study-at-home student in no time! Check out our Advice section for more helpful tips for economists 1. Start good routines It’s super important to set yourself a time to wake up, eat a healthy breakfast and start to study. It’s tempting to wear pyjamas all day if you’re not leaving the house for anything except to pick up emergency Oreos. But you’ll feel much better if you take care of yourself with a normal clean-cut routine at home. Shower, get dressed, brush your hair and you’ll feel a million times more motivated every day. Easy. Studying from home also gives you the opportunity to work whenever you want. Every student has their own peak time when they concentrate best. Some people are night owls, while most are early birds. Make the routine work for you, pick when you are most productive, and work when your brain is most alert, so that you’re able to process and retain the information you are studying. 2. Study space The bed is not the best option. It may beckon you with comfy pillows, but rest assured, it never works out. Reading flashcards from the duvet isn’t going to associate the space with the right activity. Sitting at a table in a good chair can make or break your productivity. How can you stay focused on that tough statistics problem if you’re distracted by your aching back? Working in bed promotes bad posture, which not only decreases concentration but can also give you back pain in the long term. Pick a good study space away from the bed and other distractions wherever possible. It’s okay to use the kitchen even. Just beware of the snack attacks! Try to study on a surface that is not used for mealtimes too, even if it’s the other end of the dining room table (to associate it with being a workstation, and keep the activities separate to maintain focus). 3. Order from chaos Having a tidy work area helps to stop procrastination. Think about it: it makes sense. Tidying is never enjoyable, and if your mess is interrupting you completing your study, it’s hard to be motivated. The more time you take to find your favourite highlighter, the more time it will take you to finish your work. Study smart. Keep things organised and use folders. You might have a lot of chaotic notes too, so to help, only put out the things you need for the subject you are studying that day. Removing distractions can be as easy as making your study space a tech-free zone. Turn off your phone or block all notifications, because as we all know, spending three hours on TikTok and Insta is not getting you closer to academic success. Successful economists motivate themselves, and great students will push themselves to engage with the study programme and complete as best as they can their assignments. 4. What to take from a study session Being productive is hard in a low-pressure working environment without teachers to explain things to you. Give yourself and your study time direction by setting attainable goals. Some people work best by asking questions before, during and after a session, such as: What am I about to learn, and how does it fit into the bigger picture? Are there key words or ideas I need to note down? Why are these important? What do I need to review in more depth next time? Sometimes, explaining to a friend or family member what you’ve just learnt is the best way to show you’ve understood a concept clearly. If no one is around to talk (or video call), setting yourself the task to put pen to paper and paraphrase the things you’ve just read is useful too. 5. The mental block When your mind is completely uninspired, it can be hard to see how to make progress with your studies. Some people swear by the lava lamp, Rubik’s Cube, stress ball or fish tank. Another idea is to find short podcasts that are relevant to your topic. They can help re-centre the mind, and allow you to get back on to things like crunching economic historiography. Taking breaks is not a sin, but you need to be brutal in the timings and make sure you study too. As INOMICS has previously discussed, excessive screen use from social media can prompt feelings of anxiety and agitation, so moderation is key, and we recommend taking it away from your study time entirely. What is infinitely better for your learning, and to combat depression as a result of too much isolation, is to video call your classmates or teacher, to discuss the topics you’re struggling with, and share your thoughts when you know your knowledge is stronger. Regular communication with your peers while studying from home boosts morale. Also, when we are inside more, in darkened areas, our melatonin levels are higher. This is the chemical in our body that makes us sleepy. So, try to work as close to natural light as possible! Working near a window or in a light space will preserve your sanity, as seeing the outside world a little will keep your body more awake! Got any more tips for studying at home during the corona pandemic? Email our editor at jamesa@11academianetworks.com. Image credit: My Gre Exam Preparation
With the coronavirus making studying from home the new norm, it’s imperative we look beyond the frustrations of no longer having face-to-face contact and find a routine to keep our brains alert, and educational progress on track. Yes, it’s a difficult time, but INOMICS is here to help.
Whether America will see a wealth tax in the foreseeable future is moot - certainly, vested interests will leave no stone unturned in its attempt to thwart it. Nevertheless, it’s now part of the conversation, and its growing popularity among the public suggests it’s here to stay. But why now? How do we explain the ‘resurgence of interest in tax policy research’ that wealth taxation proposals have helped spark, and the American Economic Association (AEA) has so excitedly observed? Gaining popularity In many ways, its popularisation is surprising in how slow it’s been, for extreme wealth inequality, which it explicitly targets, has long been a sad fact of American life - and current trends offer little reason for future optimism. Over a decade ago, President Obama described it as ‘the defining challenge of our time’, hoping, implicitly, that his tackling of it would become his defining success. Despite these aspirations his administration did little to affect the underlying economic factors that contributed to its spread. That’s not to say no progress was made; it's rather to recognise that tweaking income tax rates and gently increasing tax subsidies for low-wage workers, while praiseworthy, were insufficient to reverse the effects of decades of regressive tax policies and deregulation. Consider: between 1995 and 2016 the net worth of the top one percent almost tripled, the middle class’s barely budged, and the bottom ten percent - those most vulnerable - saw theirs shrink. Clearly, the social mobility that Americans hold so dear, and upon which their collective sense of self rests, has ground to a halt - and conservative adjustments to taxation have failed to reanimate it. Wealth taxation presents a bolder approach; it's found appeal for that reason. <11an>limit:2;categories:jobs|courses|programs;disciplines:Financial Economics (JEL G)|Public Economics & Economic Policy (JEL H)</11an> Its champions Building on the work of Thomas Piketty, who catapulted the idea of wealth taxation into the mainstream, fellow French economists, Gabriel Zucman and Emmanuel Saez, have become its most public advocates. The pair came to prominence with the publication of their 2018 book, The Triumph for Injustice, which disputed the accuracy of previous estimates of inequality, claiming they had underplayed its existence. By their estimates, the top tenth of one percent of Americans (fewer than 250,000 adults) held 19.3 percent of all wealth in 2018. Their conclusion, like Piketty’s, was that wealth has to be taxed. The book sent shockwaves through policy circles, galvanising the left. Its key messages were assimilated into the tax reforms of both Warren and Sanders, the senators claiming their respective wealth taxes would earn $3.75 and $5.35 trillion over the next decade. What the critics say In a society so fiercely individualistic and inherently sceptical of government intervention, such proposals have predictably come up against staunch opposition. Of the criticisms levelled, there are a number that reappear, around which rebuttals tend to coalesce. The most popular of these is that it’s been tried before, and it failed. Critics like to recall that in 1990, twelve members of the Organisation for Economic Cooperation and Development (OECD) had wealth taxes, and now only three remain - both Germany and Sweden among those that rejected it. If, as Larry Summers contends, ‘the most egalitarian European societies’ can’t make it work, what chance do the Americans? Browse our job listings for economics opportunities In defence Ignoring that in most instances the tax was removed by conservative incumbents, this interpretation is still superficial. For one, Europe, unlike America, allows for tax competition, meaning a rich, tax-averse business person in Paris, need only cross the border to Belgium to avoid the grasping French taxman. This was a huge problem - while in operation the rich had little issue resettling, and EU member states have never taxed their nationals living abroad. America would not face this problem, as US tax responsibilities aren’t so easily escaped - certainly, moving to Canada would offer no refuge. For unlike any other nation, Americans remain answerable to their revenue service, the IRS, wherever they live, and only become exempt if they renounce their citizenship. As a disincentive to do so, under both Warren and Sanders’ proposals renunciation would accrue an exit tax of 40 percent on net worth. Enforcement for the US would be less of a problem, too. The Europeans have tolerated a high-level of tax evasion as leaks like the Panama Papers have shown, and were never able - or willing - to legislate meaningfully against it. In contrast, America has been far more assertive. The Foreign Account Tax Compliance Act, for instance, demands all foreign financial institutions send detailed information to the IRS about the accounts of Americans each year, or face sanctions. Almost all cooperate, and tax is duly collected. The European failure also owed much to the number of exemptions and deductions that were added, which eventually rendered it non-functional. Each year, as pressure applied by the rich grew, items that had previously ‘contributed to wealth’ were struck off. Paintings were exempted, main homes received reductions, etc. In large part, this was because the tax began at around one million euros, meaning many had to pay it, which led to a greater level of pushback, and eventually a longer list of exemptions. America need not fall into this trap. Warren and Sanders’ proposals show that to be lucrative, it’s only necessary to target the super rich, the 0.01%. This demarcation would help maximise support and minimise opposition. Is it workable? Is it worth it? Outside of comparisons with Europe, many question the policy’s basic workability. How, for instance, is taxable wealth calculated? With money wrapped up in art and real estate, tracking and then calculating wealth would be a difficult and time consuming task, likely involving thousands of civil servants. It overlooks, however, the form that the wealth of the super-rich increasingly takes: stocks in publicly traded corporations which often they themselves have founded. Amazon founder, Jeff Bezos, for example, has an annual salary that earns him a reported $81,840, while his net worth stands at $156 billion. His wealth derives largely from his stocks in Amazon. Taxing these untapped financial assets would raise billions, and relieve some of the pressure, financial or otherwise, in locating and valuing art, real estate, or whatever form wealth takes. And if a few Monets are left slightly undertaxed, so be it. Now’s the time Others remain unconvinced that the concentrations of wealth claimed by the likes of Piketty, Zucman, and Saez even exist. Which itself raises an interesting point. The best way to ascertain whether a wealth tax is necessary is to impose a wealth tax, as it’s the best possible source of wealth data. If the wealth is there, in the quantities and concentration believed, it will be taxed, hugely increasing government revenue. Free childcare, tuition, and healthcare, policies that hit at the heart of inequality, would suddenly become feasible goals. Society could be transformed. If it’s not there, the tax can be repealed - but at least we would know. With support among the public growing, crossing party lines, is this not reason enough?
The emergence of Joe Biden as the unassailable front-runner in the Democratic Primary belies a contest that at various turns broke new ground. From its unprecedented field, larger and more representative than ever (save the brief participation of two billionaires), to the remarkable resuscitation of one moribund campaign, the departure from custom was clear. Nowhere was this more obvious than in policy, where the inclusion of senators, Elizabeth Warren and Bernie Sanders, dragged the conversation leftwards into distinctly uncharted territory. While all candidates acknowledged America’s extreme inequality and the need for better healthcare, social security, etc., divergence came in the prescribed means of redistribution, and unusually discussion extended beyond familiar calls to raise income tax for the rich. Most liberal of the proposals was a wealth tax: an annual tax on everything an individual owns. Its mere suggestion confirmed an improbable rise of a policy that until recently was dismissed as fringe and anti-aspirational.
Fiction might not be the first place you turn to to get your hit of economics, but it can be surprisingly revealing, especially in helping one consider how economics overlaps with other issues in the real world, like politics, family, technology, and ideology. And what better way to spend your time while in coronavirus isolation than reading a load of great fiction from the world's most famous authors, and getting your daily dose of economics to boot? Check out our Advice section for more helpful tips for economists INOMICS and our parent company 11 Academia Networks are Amazon Associates, meaning we are a part of their affiliate program. This article contains affiliate links, which means we may earn money through any qualifying purchases made after you click through. However, this is not a sponsored post. 1. Jane Austen - Pride and Prejudice Forward-thinking for its time and still with enough humour to keep it entertaining today, Austen’s classic weighed up the economic pressures of nineteenth-century society against the importance of marrying for love. Its opening line, since extremely famous (‘It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife’), sets up the plot for the rest of the book: that Mr Bennet must marry off one of his five daughters in order that his inheritance be passed on to his children, helping them avoid destitution. Economists will appreciate the importance money plays in the novel, as well as the touching moral that love should and will overcome all. 2. George Orwell - Keep the Aspidistra Flying Orwell’s searing critique of the middle- and upper-classes, and treatise on socialism and its many hypocritical followers holds weight to the present day. Keep the Aspidistra Flying catalogues the woes of a man failing to rebel against a monetary culture that seems to suck in all around him. Based on Orwell’s own experiences of working in bookshops and purposefully living on the streets to get a taste of what it was like to be a rough sleeper in the 1930s, this accessible novel tells a defeatist tale of how difficult it is to live in a world in which money rules and how degrading the social conventions of the time could be. Anyone attempting to make a living being a writer will be particularly enticed by the (mis)fortunes of the struggling artist Gordon Comstock, whose second biggest problem after poverty is his inability to finish any project with a sense of satisfaction while attempting not to sell out. 3. Arthur Miller - Death of a Salesman The only play on our list, but well worth reading (as well as seeing, if you can find a production somewhere), Miller’s 1949 classic plays on the idea of the American Dream: making it off your own back. Willy measures his and his family’s happiness in terms of how successful they are and how much money they have, pushing his son Biff to be as ambitious as he can be. Does money make us well-liked and therefore happy? It seems unlikely from what we know of how happiness works, and yet this societal pressure, from which the world still suffers, is exactly what Miller criticises through the lens of the relationships Willy has with his family and friends. A biting criticism of the American money-focused way of life, Death of a Salesman is also a touching family drama and remains thematically relevant today. 4. Aldous Huxley - Island The companion to Huxley’s more-famous Brave New World and his last novel, Island is a utopia Huxley actually believed in. Influenced by Pyotr Kropotkin’s anarcho-communist ideas and the economic principles of Georgism, economists will have a field day dissecting the island’s society and economy. Later themes in the book include the use of drugs to achieve spiritual awakening, freely-available contraception to enable sexual freedom, and group living to maximise the upbringing of children. Unfortunately, this almost-perfect society is constantly beset on all sides by the tyrannies of capitalist, imperialist states that just won’t leave it in peace. A romanticised vision, perhaps, but a must-read all the same. 5. John Steinbeck - The Grapes of Wrath One of the great American realist novels of the twentieth century, Steinbeck’s enduring tale of the hardships of the working-class during the Great Depression remains a compelling and accessible read nearly a century after the events depicted. Following the troubles of a tenant family which is forced to leave its hometown, it catalogues their journey to the West Coast in order to find a new life. Widely read in schools and seen as one of the Great American Novels, economists will be drawn to its realistic depiction of the monetary strife that beset many during the Great Depression, and serves as food for thought in our current age of economic hardship and inequality. 6. Frank Herbert - Dune Of the science fiction classics, Dune sticks out near the top of the list. One of the best-selling sci-fi novels ever and the winner of many awards, Herbert’s first in his six-book saga even inspired the names of some of the features of one of Saturn’s actual moons, Titan. Set in space and taking its cues from feudal life, families are made stewards of various planets in an interstellar empire. The novel layers themes of politics, economics and technology to create an intricate world based around the importance of a drug called melange which is essential to the ruling of the empire and to space travel. Important for its thematic approach to the decline of empire and its parallels to modern-day imperialism, Dune was praised as much for the truth of its analyses of the modern world as its realistic world-building and imagination. 7. Ayn Rand - Atlas Shrugged The Nickelback of philosophical literature, Rand’s self-proclaimed magnum opus is simultaneously hated by many literature-lovers and loved by conservatives. Essentially written to outline Rand’s philosophy of Objectivism, Atlas Shrugged details an American society in which businesses are suffering badly through extensive government intervention. A staunch promoter of individualism and the idea that the main purpose of life is to maximise one’s own happiness, Objectivism and Rand’s work have been popular among libertarians, although academic philosophers have mostly rejected her ideas. Still, as a novel which has influenced much, from politicians to the 2007 video game Bioshock, it’s a worthy contender for our list.
There are plenty of books which are important for economists to read in the non-fiction department, from the very popular to the extremely academic. But what of fiction books - novels, plays, and the like? It's important not to forget that even stories which aren't 'true' in the dictionary definition sense of the word can tell us a lot about the realities of the world.
What Impact Has the Coronavirus Had on Higher Education?
Similarly, universities have begun shutting up shop, not willing to risk large swathes of students being affected by the virus. So what does this mean for students who are unable to study, and what are some of the potential workarounds? Universities close their doors Across many countries, universities and importantly their libraries have been shut down. In Berlin, for example, all Freie Universität libraries shut down officially on the 16/03/20 for an indeterminate period, some having already closed during the week before. In Italy, universities have already been closed for some time, as have major universities in the USA. It is surely only a matter of time before this happens broadly across most of the world, assuming the virus isn’t brought under control soon. Currently, many universities are on study break, meaning a few weeks during which there are no seminars, lectures or tutorials, allowing students to write their essays or do exams. With libraries shut, leaving students unable to find the research materials they need, deadlines for essays and exams will have to be pushed back to allow time for these students to still do their research. Moreover, with universities closed, many students who need to speak to their professors and tutors for help with their essays won’t be able to, at least, not in person! This causes problems for students who need to talk through their ideas with their supervisors, like, for example, those writing Bachelor’s or Master’s theses. With nobody to turn to for advice, many will cease to write until they are able to talk to the people advising them on their chosen topic. The economics of the virus There is an economic impact of the coronavirus on institutions, too. At the beginning of February when Australia began closing its borders, many Chinese students had gone back to their home country for the semester break, which over this period lasts around three months. Due to the travel ban that was put in place, many of these students were unable to return to continue their studies. The financial costs of this show just how reliant many universities are on international students willing to pay vast sums of money for their education: schools across Australia were expected to accrue costs of up to A$8 billion due to tuition fee refunds, accommodation costs and the reorganisation of teaching calendars. These economic costs will also affect universities in other countries, particularly those which have mandatory tuition fees. Furthermore, IELTS and TOEFL, two of the main providers of English proficiency tests, have also stopped working in China, which will drastically hinder the ability of newer students who need to show they can speak the appropriate level of English in order to study in that language. This will mean subsequent intakes of students especially from China but also all over the world will be lower as fewer students are able to provide the certificates they need. Abroad semesters and university meals Another problem has been students studying outside of their home university’s country. Many partake in a semester abroad to widen their cultural and philological understanding, and plenty go to China and Italy to do this, two of the regions hit hardest by the virus. In both instances, students were forced to fly back or, when the quarantine in Italy began, left of their own accord despite the travel restrictions. Aside from the fact that this may mean the virus spreads further outside of those respective countries, it also spells the end of a semester abroad which likely had not yet ended, an upsetting revelation for those who enjoy the excitement of studying somewhere else. And what of those students who rely on meal programs at university, something particularly common in the US? These students, who pay not only for their accommodation but also for their food through the university, may no longer be able to afford food as everything is normally provided at discount rates by their school. What are the solutions? The main way this crisis of higher education can be averted is by universities switching to online learning. Universities are already starting to do that, urging professors and seminar leaders to make sure all learning materials are online and easily accessible to all students. Obviously communication must also move to email or, if tutors allow, apps like WhatsApp which allow group functions, meaning everyone can be simultaneously notified of updates instantly. Seminars and lectures can potentially be recorded and distributed among students, and if supervisors are needed to help with term papers, that could be organised through things like Skype or even a simple telephone call. At the same time, students and university staff alike need to appreciate that in this confusing, quarantined time, nothing is going to run as normal. Professors and lecturers need to offer their students adequate attention over email to make sure their needs are met, as well as being lenient with deadlines for essays which it may now not be possible to write. On the other side, students need to be patient with supervisors and leaders who may have hundreds of students to respond to, and who may be sick themselves but still trying to work. With a little understanding and a little effort and investment into digital technologies, universities and students will be able to offer all they can to keep higher education alive during this difficult time, and ensure students get the most out of their education which, in many cases, they pay a lot of money to have. As for the other more minor problems, those who have had their abroad semesters cut short are unfortunately unlikely to receive any help from universities, which have enough on their plate right now. Those meal programs which no longer run may, however, be replaced by ‘grab and go’ meal programs offered by universities, though as buildings shut across Europe and the United States, it remains to be seen whether these programs will be put into place, and if they are, for how long they will run. As for admissions and the tests needed, there is no chance of getting hundreds of students into a hall to finish their exams: the only solution is that students wait until the virus outbreak has been contained (or a vaccine has be found!) and the next university intake begins, something that will affect both their lives and the economic interests of universities. Hopefully universities offer at the very least online practice tests and exercises so students can stay abreast of what they can expect when exam halls do open again. Until then, it looks like many students will be cut off from any physical contact to their university. In the meantime, it’s an opportunity for students to use their free time and make plans for catching up on their studies in the summer, for example during summer courses. Check out here the list of our recommendations for summer schools in the summer 2020.
As the spread of the coronavirus continues across the world, many questions remain unanswered, not least what is going to happen to those thousands of students whose universities have also been affected by the pandemic. Schools, offices, museums, restaurants and bars are being closed across the world, and curfews are in place in particularly affected countries.
The empty promises began in 1997 when the Kyoto Protocol demanded governments stop subsidizing all ‘greenhouse-gas-emitting sectors’. Posturing world leaders dutifully queued up to pay lip service, establishing a now familiar tradition. While attending various climate summits, each would (re)commit to the eradication of fossil fuel subsidies, implore others to follow suit, and then, as if nice sounding words were all it took to cleanse the world of greenhouse gases, return home and do nothing. President Obama claimed in 2012 that a hundred years of subsidies to the oil companies was over - he lied. In 2020, annual global subsidies to the fossil fuel industry were estimated at $500 billion, and following a blip between 2013-16, are on the rise again. But why? How did governments, whose raison d'être is to keep their citizens safe, come to prop up an industry that puts lives at risk? And how great a threat does it pose? It began so well... Once upon a time it actually made sense. Indeed, when fossil fuel subsidies were first implemented they were endorsed by progressives for their equalising influence. Whether direct financial transfer, preferential tax treatment, or government infrastructure spending, it didn’t matter, they did what all subsidies do: reduced prices, in this case, the price of energy. By doing so, they gave those mired in poverty access to electricity, heating, and ultimately the components needed for a dignified life. There was also the added benefit of securing national energy supplies, as supporting indigenous production reduces dependency on foreign imports, which cannot always be guaranteed. Securing the energy supply was securing the country’s future - another easy sell. Noble-sounding as these justifications may be, the refining of green technologies mean they hold diminishing credibility, especially in the developed world where 80% of all historical carbon emissions have been emitted. A recent report by the International Renewable Energy Agency (IRENA) has shown that ‘onshore wind and solar PV power are now, frequently, less expensive than any fossil-fuel option’, and ‘the costs of new solar and wind installations’ - previously the greatest obstacle to its widespread adoption - ‘will increasingly undercut even the operating-only costs of existing coal-fired plants’. Besides some relatively isolated instances, the claim that subsidies expand energy accessibility by reducing costs, although still made by its advocates, is no longer true. Just last year, UN secretary general, António Guterres, declared, unequivocally, that fossil fuel subsidies only serve ‘to boost hurricanes, spread droughts, melt glaciers, (and) bleach corals’, and instead of using taxpayers’ money to ‘destroy the world’, the same finances should be redirected towards renewables. A 2019 report from the International Institute for Sustainable Development (IISD) substantiated these demands, claiming that it would only take 10-30% of current fossil fuel subsidies to be swapped for the balance to be tipped, decisively and irrecoverably, in favour of green energy, triggering its ‘rapid global rollout’. Speed is crucial, too, for although the transition is already underway, progress has been slow relative to what’s required. This swap could be the shot in the arm renewables need to take them from ‘viable and competitive’ to the only choice. Even without transference, the elimination of fossil fuel subsidies would significantly reduce emissions, such is the industry's reliance on them. Indeed, in some areas, certain subsidies are allowing for its entrenchment and even expansion. Consider, for example, the federal tax break that allows oil producers in the US to deduct almost all the costs of constructing and drilling new wells from their taxes, by far the most costly part of the process. By lowering the amount of upfront cash-flow required by producers, (the buy-in, so to speak), new and expanding enterprises are incentivised to drill more wells than would otherwise have been financially feasible. And once established, each well can then produce oil for up to 40 years. Through this process, known as ‘carbon lock-in’, fossil fuel production accelerates and greenhouse gas emissions increases. Meanwhile, the distorted market makes it harder for new, green energy to compete. A paper published in the journal, Nature, in 2018 offers statistical support for why subsidies should be eliminated, suggesting that it would reduce emissions by ‘five hundred million to two billion metric tons of carbon dioxide per year by 2030’. For context, that amounts to roughly a quarter of the energy-related emission reductions pledged by the Paris Agreement signatories, which few are on the path to meeting. The real cost Alarmingly, the amount of subsidies are far higher when the negative externalities caused by burning fossil fuels are also considered. Using a somewhat loosened definition of what constitutes a subsidy, a study by the International Monetary Fund (IMF) found that $5.2 trillion was spent globally on subsidies in 2017. That is $10 million per minute and 6.5% of global GDP. In addition to conventional subsidies, the financial or tax support aimed at lowering the cost of fuel, the report included the indirect, often hidden costs of burning fossil fuels, primarily the spiralling healthcare costs and constant need for climate change adaptation. By including these numbers, the true damage inflicted on society is shown, allowing better informed future decisions. For instance, the IMF estimates that if subsidies were scrapped the number of early deaths from fossil fuel air pollution would be halved. Alternatively, if left ignored, the Universal Ecological Fund predicts that in America, economic losses from extreme weather combined with the health costs of air pollution will reach at least $360 billion annually over the next ten years and cripple economic growth. Click here to browse our agricultural and environmental economics job listings Vested interests Which leads to the obvious question: why not simply just stop them? The answer, in short, is lobbying. To borrow the words of Catherine Howarth, chief executive of ShareAction, ‘these companies have mastered the art of corporate doublespeak - by boasting about their climate credentials while quietly using their lobbying firepower to sabotage the implementation of sensible climate policy and pouring millions into groups that engage in dirty lobbying on their behalf’. During the 113th Congress (the 5th and 6th years in Obama’s Presidency), the oil, gas, and coal companies spent a combined $350,587,282 on lobbying and campaign contributions, the efforts of which, according to the research group, InfluenceMap, were ‘overwhelmingly in conflict with the goals of the Paris agreement and designed to maintain the social and legal license to operate and expand fossil fuel operations’. Between 2016-2019, Shell, ExxonMobil, Chevron and Total spent over $1 billion on lobbying ‘designed to control, delay, or block binding climate-motivated policy’. To gauge its success one need only look at the inclinations of the current US administration. But things must change. Politics must better insulate itself from dirty money - the consequences of not phasing out subsidies are too dire. As Chief Economist at the International Energy Agency, Fatih Birol, has said, failing to do so will mean countries fail to reach their climate targets - and down that path lies certain catastrophe. Once upon a time, it made sense for countries to support these industries, it was progressive, humane. That time, however, has now passed. Header Image Credit: Glovatskiy on Shutterstock (licensed image - copyright)
The continued existence of fossil fuel subsidies in a time of their almost universal condemnation reveals something about the governments that rule us, something pernicious, but also something all-too-predictable. Like no other area, they expose a gulf between rhetoric and action, a disconnect so stark that, if the risks it posed were less catastrophic, would almost be comical. Back in reality, though, the cognitive dissonance, cynicism, or whatever its cause, serves only to warm our planet and threaten all life.
Agricultural and Environmental Economics (JEL Q)
INOMICS unveils its A-Z of economics terms
But there’s always more we can do, and we felt the time was ripe to expand our help section to try and give even more value to young economists who are just starting out in the game. So without further ado, we’re proud to unveil our new A-Z of economics terms. Our A-Z is simple - we have professional economists write accessible but in-depth overviews of some of the most important economic terms that you will need for your studies. Starting out, we are focusing on microeconomics terms, but soon we will be expanding to macroeconomics, environmental economics, and every other type of economics you can think of. They aim to offer an insight into exactly what the term means, put it into context to make it easy to understand, and give a brief insight into where the term has been used and where you can find more academic information on the concept. First, head to inomics.com and take a glance at our header navigation. Hover your mouse of the section ‘Insights’ and you’ll see a drop down menu with the option listed ‘Economics Terms A-Z’. Give that a click and you’ll be taken to our list of all economic terms, handily listed by the first letter of the term, making it easier to find exactly what it is you’re looking for. And if you go further and click on an actual term, you’ll be able to see all the information about that term, including links through to any related definitions which we think help explain certain concepts which have been referred to. Let’s have a look at one example, adverse selection (long picture incoming): As you can see, this definition of adverse selection includes a brief, one or two sentence definition at the top, followed by a longer, more in depth definition with examples. Then some further reading is recommended which can help to expand your knowledge even more, and finally, a ‘Good to Know’ section which offers tips on how to avoid common potholes when using a term and explains some of the more tricky aspects a definition may have. Right at the bottom of the page we recommend some related terms which may be useful knowing. Watch out, too, for some of INOMICS' very own video explanations which will be appearing with some of the definitions in the coming weeks! So there you have it! INOMICS’ new Economic Terms A-Z is a godsend for anyone currently studying their economics degree and needs an accessible but thorough overview of tricky economics terms. Written by professional economists with experience at doing stuff like that, it’s a great addition to our Advice section, which offers economists tips in their studies and jobs. Confusing term getting you down? Head to INOMICS for an explanation!
Here at INOMICS, we’ve always been dedicated to trying to help you, the economist (fledgling or otherwise) get the most out of your education and career. Whether that be offering you the best new courses and conferences, nudging you towards the perfect university degree, or helping you apply to jobs once you’re done studying, we’re there to give advice and present opportunities you may not have otherwise found.
The assumption that individuals maximize utility is a cornerstone of microeconomics. It is used as a basis to explain market behavior and to predict how people act and react in particular situations. Individuals are assumed to be perfectly rational, capable of calculating how much utility they will obtain from any combination of goods and services, and choosing a combination where utility is maximized, subject to their budget constraint. In most economic modeling, an individual’s utility is described as a continuous, monotonic, and concave function of consumption. That is, the utility function U(X), where U stands for utility and X for consumption (X can be a vector of goods and services consumed), is continuous over the space of X. Its first derivative with respect to X is positive (“more is better”) and its second derivative with respect to X negative, representing the law of diminishing marginal utility. The individual will, in most cases, be limited in consumption by their income such that spending on goods and services X cannot exceed a maximum level M. The individual’s maximization problem can be posed as \begin{gather*} \max_{X}U\left(X\right)\\ \text{s.t.: }XP\leq M \end{gather*} where P is the corresponding vector of prices for the goods and services X. Figure 1 depicts a simple two-dimensional case where the individual chooses between combinations of items X1 and X2 (item X2 might also represent “all other items” in order to study the individual’s choices of X1 compared to alternatives). The items’ prices P1 and P2 and the budget M determine the set of choices the individual can make. They could devote their entire budget to X1, purchasing QX1 at a cost of P1QX1 = M, or they could do the same for X2, purchasing QX2 at a cost of P2QX2 = M. All affordable combinations of X1 and X2 are found in the grey shaded triangle which is limited by the budget line P1X1 + P2X2 = M running between the points (QX1,0) and (0,QX2). A set of indifference curves is drawn in the graph as well. Indifference curves are defined as combinations of X1 and X2 that give the individual a fixed level of utility (hence the individual is indifferent between such combinations). Due to utility increasing in X, indifference curves further from the origin (0,0) represent higher levels of utility. The individual’s utility is hence maximized at the point where the budget line is tangential to the “highest” indifference curve IC at the point (qX1,qX2), resulting in utility Ū. This means that the person will choose to buy qX1 units of X1 and qX2 units of X2; this mix is the optimal choice. On the indifference curve IC’ the individual would obtain even higher utility U’, however this is not attainable given the individual’s current budget M. Figure 1: A budget constraint with standard indifference curves Non-economists may balk at the idea that individuals calculate budget lines and indifference curves in order to make their consumption decisions. This need not be the case for the theory still to have traction. It is sufficient for the economist if individuals act as though they were maximizing utility. Utility maximization need not be a conscious or explicit process. What is important for an economist is to be able to observe behavior and then explain what is observed. Decisions that are consistent with utility maximization allow individual preferences to be summarized through utility functions, which is convenient for the analyst. Economists tend to value observing what people do (“revealed preference”) more highly than simply recording what they say they do or will do (“claimed preference”). Insofar as the future state of the world is uncertain and decisions are made under uncertainty, individuals can be assumed to maximize expected utility. This is the utility to be gained from each possible state of the world, weighted by the probabilities of the various states of the world being realized. A utility function can also be used to describe the individual’s attitude toward risk. For example, a risk-averse individual will tend to prefer lower but more certain levels of consumption over potentially high but very uncertain levels of consumption. In this case, the utility function will be strictly concave. Solving the utility maximization problem There are two main methods for solving a utility maximization problem, which students of microeconomics will become very familiar with. The first is the graphical method, explained below. The second is the Lagrange method, which is explained in the linked article. To solve utility maximization using the graphical method, it’s helpful to start with some logic. We already know that the best indifference curve is the one that is the highest attainable curve given the budget constraint. In Figure 1, this is shown as the point (qX1,qX2). At this point, the budget line is tangent to the indifference curve. Why is this? If the indifference curve is too far to the left, it is an affordable but undesirable product mix. The consumer could benefit by consuming a bundle of goods on indifference curve IC instead. Meanwhile, it’s already been established that indifference curve IC’ is not feasible because it’s too expensive for the consumer. So, any indifference curve that is best must be tangent to the budget line, like the curve IC. A curve that is tangent will be as high as possible (as it only touches the budget line at one point), and guarantees that the individual must use their entire budget to reach it. This fact allows us to construct an equation that we can solve. Because we know that the best indifference curve is tangent to the budget line at the point (qX1,qX2), we know that both must have the same slope at this point. So, all we need to do is set the slope of the budget line equal to the slope of the best indifference curve and solve. The slope of the budget line is simply the price ratio between goods X1 and X2, or how much more of X2 the individual could buy if they gave up one unit of X1. Recall from algebra that the slope of a line graphically is the “rise” over the “run”, or in this case, P1 / P2. Also note that the budget line is downward-sloping; this is because to afford more units of one good, some of the other must be given up. The slope of the indifference curve is equal to the ratio of marginal utility between the two goods, also known as the marginal rate of substitution. This is because the curve measures how much of X2 the individual would be willing to give up to have one more unit of X1 and still be at the same level of happiness or utility (hence the term “indifference”). If we set the price ratio (the slope of the budget line) equal to the ratio of marginal utilities for this individual (the slope of the indifference curve), we can solve for the utility-maximizing point. Setting these equal to each other yields the following equation: \begin{equation*} \frac{\mathit{P}_{1}}{\mathit{P}_{2}} = \frac{\mathit{MU}_{1}\left(\mathit{x^*_1},\mathit{x^*_2}\right)}{\mathit{MU}_{2}\left(\mathit{x^*_1},\mathit{x^*_2}\right)} \end{equation*} This equation can be solved by plugging in the prices of each good on the left-hand side, inserting the marginal utility on the right-hand side, and solving. This yields the optimal product mix, which can then be re-inserted into the budget constraint to find the individual’s utility-maximizing consumption decision. Remember that the marginal utility is the first derivative of the utility function, so MU1(x*1,x*2) is the first derivative of U(X) with respect to X1. See the exercise to practice this concept. The Lagrangian method is another, very common method used by microeconomists to solve constrained optimization problems. Check out our linked article to learn this method as well. Further reading Two economics Nobel laureates, Daniel Kahneman (2002) and Richard Thaler (2017) are both known for criticizing the assumption of individual rationality in economic theory and for offering plausible alternative behavioral insights. See their joint paper, “Anomalies: Utility maximization and experienced utility” (Journal of Economic Perspectives, 2006) for an excellent discussion of the limited human capacity to reason about personal well-being, in particular when time passes between consumption decisions and consumption itself. Good to know While modern behavioral economics throws individual rationality and the idea that people always maximize utility into doubt, the theory of utility maximization can also be applied to decision-making in organizations, where one might reasonably expect choices to be made with more calculation and deliberation. The theory is also widely applied in welfare economics where government decisions are justified based on the idea of maximizing a social-welfare function, which is basically an aggregate representation of people’s preferences in society. Practice solving a utility maximization problem Exercises for you <use xlink:href="/themes/custom/venice/images/icons.svg#launch-18px"></use>
Utility in economics refers to the level of happiness or satisfaction of individuals. Individuals derive utility from the consumption of goods and services, and seek to maximize their utility under any given budget.
An allocation of resources is Pareto efficient if it cannot be modified to increase the wellbeing of one individual without diminishing the wellbeing of any other individual. If it is possible to reallocate resources and improve the welfare of one person without harming anyone else, this reallocation is called a Pareto improvement, and consequently the initial allocation was not Pareto efficient. Sometimes we distinguish between Pareto efficiency in the allocation of resources and pareto efficiency in the production of goods and services. The concepts are very similar. Pareto efficiency in consumption (i.e., in the allocation of resources) means that no one can be made better off without making someone else worse off. Pareto efficiency in production implies that we cannot increase the production of one good (or service) without decreasing the production of another good or service. Let’s look at an example to better understand what a Pareto efficient allocation is: suppose you’re walking together with a friend along a beach when you discover two beautiful seashells laying there. You decide to keep one for yourself and give the other to your friend, so that each of you has one seashell. Is this allocation Pareto efficient? To answer this question let's consider whether we can reallocate resources to improve your welfare without harming your friend. If we want to increase your welfare, we have to give you your friend's seashell. But this means that we have to take away the seashell from them and their wellbeing will decrease. So, taking away your friend’s seashell makes them worse off and is not a Pareto improvement. Similarly, it is not a Pareto improvement if we take your seashell to give it to your friend. Given that we can not reallocate the resources in this example without making someone worse off, the initial allocation was Pareto efficient. What if instead of picking up both shells, you only pick up one and leave the other on the beach? Is this Pareto efficient? For simplicity, let's assume that no one else would come to pick up the seashell and also no other living being would use it. Can we reallocate the resources and improve efficiency? In this case, the answer is clearly yes. If instead of leaving the seashell on the beach, your friend picks it up, his or her wellbeing will increase without reducing the wellbeing of anyone else. This means that the initial allocation was Pareto inefficient - and leaving a seashell on the beach is not Pareto efficient. Importantly, Pareto efficiency does not tell us anything about the fairness of the distribution of resources. For example, suppose that the entire wealth of a country is given to just one single citizen, while all the other citizens do not obtain anything. Is this allocation of resources Pareto efficient? Yes, it is. Why? In order to see the answer, think about whether it is possible to reassign the resources in a way that the wellbeing of one person increases without making anyone else worse off. Is this possible? Obviously not. If we want to give something to the other citizens, we have to take resources away from the rich person. That is, in order to increase the welfare of another individual, we have to reallocate it from the rich person, and this means that their utility will decrease. Since we can’t make anyone better off without harming the rich person, the initial distribution was Pareto efficient. Coming back to our seashell example, an allocation in which you decide to keep both seashells that you found is Pareto efficient as well. Sometimes, the analogy of a cake is used to explain the difference between equality (or equity) and efficiency. The size of the cake can be measured by efficiency. If we can increase the size of the cake and people can have more cake, this clearly is an efficiency improvement. The size of the cake however does not tell us anything about how the cake is being distributed. To decide who should get what is difficult as this usually involves some judgment about what is fair or just. What would be a fair way to split the cake? Should everyone receive a piece of equal size? Should the person who made the cake get a larger piece? Should we give a smaller person a smaller piece? As you can see, there are many considerations that have to be taken into account when deciding on how to distribute the cake and asking three different people might get three different opinions. Yet, if someone invents a new technology that can convert the same amount of ingredients into a larger and equally tasty cake, then no one would object to doing so. Evidently, Pareto efficiency is a concept that is less controversial than fairness. What seems fair or just to one person does not necessarily seem fair to another person. For these reasons, economists usually focus their analyses on efficiency. Further reading In the seashell example used above we said that an allocation in which you keep both seashells and your friend has none is Pareto efficient. What happens if your friend gets jealous of you having two seashells while they don’t have any? Beckman, Formby, Smith and Zheng (“Envy, malice and Pareto efficiency: An experimental examination”, Social choice and welfare, 2000) used an experimental approach to analyze the role that envy and malice play in economic decisions. The authors found that envy and malice are strong motivations that can lead to reduced support for Pareto efficient outcomes. Good to know What would Vilfredo Pareto have to say about Robin Hood, who stole from the rich to give to the poor? He clearly would disapprove of such a reallocation of resources based on efficiency considerations. To increase the welfare of the poor, Robin Hood is willing to decrease the welfare of the rich, which means that the reallocation is not a Pareto improvement. Of course, Robin Hood would probably not use Pareto efficiency as an argument to justify his deeds.
Pareto efficiency (or Pareto optimality) is an important efficiency concept in welfare economics used to evaluate or compare different allocations of resources. It is named after Italian economist Vilfredo Pareto (1848–1923).
One of the most basic ideas in economics is that the consumption of goods and services changes our level of satisfaction or happiness (also referred to as utility). Often, we measure this change in satisfaction in monetary terms. If, for example, we want to know how much the wellbeing of a person changes if we give them a book (for free), we can simply ask this person how much he or she is willing to pay for the book. Suppose we ask a student (let´s call her Ann) what the highest price she would be willing to pay for a particular book was and her answer was €15. This means that Ann’s increase in happiness when we give her the book is the same as the increase in happiness she would experience if we gave her €15. In the special case when consumers consume just one unit of a good, the marginal utility is the same as the maximum price the consumer is willing to pay for that good. However, we do not consume just one unit of most goods and services, but several units. Some examples include the number of cups of coffee we drink each day, the number of text messages we send, the number of megabytes we stream, the liters of gasoline that we fuel our car with, and so forth. Each additional unit that we consume (e.g. each additional cup of coffee we drink) changes our wellbeing. This change in wellbeing from one unit to the next is what we call marginal utility and for many goods and services it is not constant from one unit to the next. Law of diminishing marginal utility Consuming additional units of a good or service increases our wellbeing, but the change is not necessarily the same for each unit. For instance, let's say you consume three cups of coffee. The first cup you might enjoy a lot; it wakes you up in the morning and gives you a lot of energy to help start the day. The second cup you might also enjoy, but probably a bit less than the first one. Then, the third cup might not increase our overall wellbeing at all. At this point, you feel that you’ve had enough coffee. This property, that the marginal utility decreases with the number of units we consume, is called the law of diminishing marginal utility. For many goods and services, the law of diminishing marginal utility holds, although in some cases the change in utility might decline faster than in others. But, for certain types of goods, the change in utility might be almost the same for each unit or not decrease at all. One clear example is fresh, uncontaminated air – as you consume more clean air, the utility it adds to your life remains roughly the same. Marginal utility can also be negative if our wellbeing decreases after some point. The 5th cup of coffee, for example, might actually make us anxious and feel unwell. This holds true of many other goods, such as desserts (too sweet), streaming service subscriptions (too many monthly charges), etc. How to calculate marginal utility As explained above, marginal utility is the change in total utility if we consume one more unit. Suppose we want to calculate the marginal utility that the 3rd cup of coffee gives to an individual who gains the following total utility from consuming this (see below) number of coffees: Nr of cups of €2 coffee 0 1 2 3 4 5 Total utility (measured in monetary units) 0 5 7 8 8 5 As we see from the table, the first cup of coffee increases the total utility of our individual by the same amount as if we gave them €5. It is the difference in total utility between consuming 1 cup and zero cups of coffee: <m:omathpara><m:omath><m:r>Marginal</m:r><m:r> </m:r><m:r>Utility</m:r><m:r> (</m:r><m:d><m:dpr><m:ctrlpr></m:ctrlpr></m:dpr><m:e><m:r>MU)</m:r></m:e></m:d><m:r> </m:r><m:r>of</m:r><m:r> </m:r><m:ssup><m:ssuppr><m:ctrlpr></m:ctrlpr></m:ssuppr><m:e><m:r>n</m:r></m:e><m:sup><m:r>t</m:r><m:r>h</m:r></m:sup></m:ssup><m:r> </m:r><m:r>unit </m:r><m:r>= </m:r><m:r>Total</m:r><m:r> </m:r><m:r>utility</m:r><m:r> from </m:r><m:d><m:dpr><m:ctrlpr></m:ctrlpr></m:dpr><m:e><m:r>n</m:r><m:r> </m:r><m:r>units </m:r></m:e></m:d><m:r>- </m:r><m:r>Total</m:r><m:r> </m:r><m:r>utility</m:r><m:r> from </m:r><m:d><m:dpr><m:ctrlpr></m:ctrlpr></m:dpr><m:e><m:r>n </m:r><m:r>- </m:r><m:r>1 </m:r><m:r>units</m:r></m:e></m:d><m:r>. </m:r></m:omath></m:omathpara> <m:omathpara><m:omath><m:r>MU</m:r><m:r> </m:r><m:r>of</m:r><m:r> 1</m:r><m:r>st</m:r><m:r> </m:r><m:r>cup</m:r><m:r> </m:r><m:r>of</m:r><m:r> </m:r><m:r>coffee </m:r><m:r>= </m:r><m:r>Total</m:r><m:r> </m:r><m:r>utility of</m:r><m:r> 1 </m:r><m:r>cup </m:r><m:r>- </m:r><m:r>Total</m:r><m:r> </m:r><m:r>utility</m:r><m:r> of 0 </m:r><m:r>cups </m:r><m:r>= 5 - 0. </m:r></m:omath></m:omathpara> We can compute the marginal utility of the other cups of coffees as follows: Nr of cups of €2 coffee 0 1 2 3 4 5 Marginal utility 0 5 2 1 0 -3 Let's say the price per cup is €2. How many cups will a rational individual consume? The change in total utility of the first cup is equivalent to €5, while the price is €2. Thus, the marginal utility exceeds the price of the good and a rational utility maximizing person will buy the first cup at a price of €2. What about the second cup? The increase in utility is the same as the price of the cup. This means that our individual is indifferent. They are unsure whether to buy the second cup of coffee or keep the money, since both yield the same amount of utility. A rational consumer will buy or consume a unit of a good if the marginal utility of this unit exceeds the price he or she has to pay for this unit. It is valid to assume that the customer does purchase the second cup here since it does not lower their overall utility. However, they would not purchase the third cup, since they would be giving up €2 to receive only €1 worth of utility. In many applications we assume that goods are perfectly divisible and we will have a particular utility function given. In these cases, the marginal utility is simply the derivative of total utility. Let’s consider an example: suppose we have an individual with utility function <m:omath><m:r>u</m:r><m:r>(</m:r><m:r>q</m:r><m:r>) = </m:r><m:r><m:rpr><m:scr m:val="roman"><m:sty m:val="p"></m:sty></m:scr></m:rpr>ln</m:r><m:r>(</m:r><m:r>q</m:r><m:r>)</m:r></m:omath>, where q denotes the number of units the person consumes of a particular good. For this utility function, marginal utility <m:omath><m:r>MU </m:r><m:r>= </m:r><m:f><m:fpr><m:ctrlpr></m:ctrlpr></m:fpr><m:num><m:r></m:r></m:num></m:f></m:omath><m:omath><m:f><m:num><m:r>∂u</m:r></m:num></m:f></m:omath><m:omath><m:f><m:num><m:r>/</m:r></m:num><m:den><m:r></m:r></m:den></m:f></m:omath><m:omath><m:f><m:den><m:r>∂q</m:r></m:den></m:f></m:omath><m:omath><m:f><m:den><m:r> </m:r></m:den></m:f><m:r>= </m:r><m:f><m:fpr><m:ctrlpr></m:ctrlpr></m:fpr><m:num><m:r>1/</m:r></m:num><m:den><m:r>q</m:r></m:den></m:f></m:omath>. This is the marginal utility of the qth unit. If we want to know what the marginal utility of a specific unit is, for instance the 3rd unit, we simply compute the value of MU for <m:omath><m:r>q </m:r><m:r>= 3</m:r></m:omath> and obtain <m:omath><m:r>MU</m:r><m:r>(</m:r><m:d><m:dpr><m:ctrlpr></m:ctrlpr></m:dpr><m:e><m:r>3) </m:r></m:e></m:d><m:r>= </m:r><m:f><m:fpr><m:ctrlpr></m:ctrlpr></m:fpr><m:num><m:r>1/</m:r></m:num><m:den><m:r>3</m:r></m:den></m:f><m:r>.</m:r></m:omath> Marginal utility and the law of demand The marginal utility is the change in wellbeing of consuming one more unit and is equivalent to the maximum willingness to pay for this additional unit. The law of diminishing marginal utility tells us that the change in wellbeing decreases as we consume more and more units. This means that the willingness to pay for one additional unit also decreases as we consume more units. Thus, there is a negative relationship between the quantity consumers want to consume and the price they are willing to pay for that quantity. Put differently, the higher the price, the lower the quantity demanded. This is what we call the law of demand. Further reading Marginal utility is a central concept in neoclassical economic theory and so is the idea of diminishing marginal utility (sometimes also called marginal value). Is there any empirical evidence of the law of diminishing marginal utility? Yes, there is. “A Test of Diminishing Marginal Value“ (Economica, 2006) by authors Horowitz, List and McConnell confirms in an experimental setting that there is strong evidence of diminishing marginal value. Good to know In our discussion we have focused on the marginal utility of a good and argued that for goods the law of diminishing marginal utility holds: the more units we consume the less our wellbeing increases. What about "bads"? How does the marginal utility (in this case with "bads" causing disutility, which is negative marginal utility) change as we consume (or have to consume) more and more units of the "bad"? For example, suppose there is a large construction site next to your apartment that creates a disturbing noise. How much would you be willing to pay for a few hours of quiet each day? Maybe for the first few hours not that much as you may spend the time cleaning instead of studying, going to the supermarket, etc. But as the number of hours that you suffer increases you may be willing to spend more and more money to have a few moments of peace. This is what is called the law of increasing marginal disutility. While marginal utility is supposed to be decreasing with consumption, marginal disutility is increasing according to economic theory.
Marginal utility in economics is the change in wellbeing (or change in total utility) that a person experiences if they consume one additional unit of a good or service.
The story of the prisoner’s dilemma is as follows: two criminals are arrested on suspicion of having committed a crime, let's say a bank robbery. The police do not have enough evidence to convict them for the robbery, but they have smaller charges on each of the two. The prisoners are being held captive in separate cells of a prison without any possibility of communication. The general attorney offers both prisoners the same deal: if they betray their accomplice (or 'defect' as it is called in the table below) by testifying as a witness they can go free and will not have to serve any prison sentence whatsoever. However, it is not that simple. Should the other also testify, meaning that they both implicate each other, each will serve 2 years in prison. If only one testifies while the other remains silent, the one who does not testify (the silent one) will be sentenced to 4 years in prison, while the one who does testify will go free. In the case that they do not betray each other, that is, that both remain silent and cooperate, they cannot be proven guilty of the bank robbery and both will be sentenced to 1 year in prison for the minor crimes. In this two-player game, each player has two options: cooperate with their partner in crime and remain silent, or testify and betray their accomplice, i.e., defect. The prison sentences represent the payoffs of each decision and these payoffs of course depend on whether each accomplice accepts the deal offered and defects, or remains silent and cooperates. The following payoff matrix describes the possible outcomes of the game. Player 2 Cooperate Defect Player 1 Cooperate -1,-1 -4,0 Defect 0,-4 -2,-2 What is the equilibrium of this game? To answer this question, we first have to find the best responses of the two players. Suppose player 2 cooperates and remains silent. In this case the best option for player 1 is to defect and betray his partner as he would receive a sentence of 0 years, instead of the 1 year he would get if he remained silent. Now suppose that player 2 defects and betrays her partner. The best response of player 1 is again to defect as this would lead to a sentence of 2 years for each of them, far preferable to the 4 years he would have to serve if he kept quiet. For player 2 the situation is identical (the game is symmetric), which means that her best response is to defect and betray player 1. Thus, in the unique Nash equilibrium of this game both prisoners will defect and accept the deal they were offered by the general attorney. As both implicate each other, each of them has to serve a 2-year prison sentence. In this game “defect” is the dominant strategy and “cooperate” is the dominated strategy. A strategy is dominant if it leads to a higher payoff no matter what the other player(s) do. A strategy is said to be dominated if under no circumstances it is optimal for a player to use it, as in it yields a lower payoff than any other strategy regardless of the other players’ strategies. In the prisoner’s dilemma it does not matter whether the accomplice decides to remain silent or betray his or her partner. In both cases the other player maximizes their payoffs by defecting. This result is interesting in so far as both prisoners would be better off if they cooperated and remained silent, as in this case each would only be sentenced to 1 year. Yet, the fact that our players are fully rational and only think about maximizing their own payoff (or utility) this outcome cannot be reached. Even if the accomplice remains silent, each prisoner has an incentive to deviate and betray the partner to reduce their sentence. A lot of research in game theory has focused on finding ways in which cooperation can be established in the prisoner’s dilemma. One way out of the dilemma is to consider a repeated game in which the players meet not only once, as in, there are multiple rounds. In the repeated prisoner´s dilemma where the final round is not specified, betraying an accomplice will have a negative impact on a criminal´s reputation and will make future cooperation harder. For example, if the involved criminals are part of a gang, going free by betraying a fellow gang member may no longer be a dominant strategy given the future consequences. Possible strategies in the repeated or iterated prisoner´s dilemma include tit-for-tat and grim-trigger strategies. If players play a grim-trigger strategy, they start with cooperation in the first round of the game and then cooperate until one player defects. If someone defects, all players will defect from this point in time onwards. Following this strategy, cooperation can be sustained as long as players care sufficiently about the future. If players play tit-for-tat, they also start with cooperation in the first instance. A player cooperates if the other player cooperated in the previous period and defects if the other player defected in the previous period. <11an>limit:2;categories:Jobs|Courses|Programs|Conferences;countries:France|Germany|United Kingdom|Italy;disciplines:Economic Thought & Methodology (JEL B)</11an> Further reading Theoretically cooperation is not possible if the players know exactly how many rounds will be played, because everyone will want to defect in the last round and by backward induction this also means that in the other periods all players will defect. In experiments cooperation occurs even in the finitely repeated prisoner´s dilemma. Embrey et al. (The Quarterly Journal of Economics, 2018) show that in experiments a player cooperates as long as the others cooperate until a certain threshold round. The more experienced the players, i.e. the more often they have already played the game, the earlier they start defecting. Good to know Game theory in general and the prisoner´s dilemma more specifically have been used in the 1950s and 1960s to analyze conflict during the period of the cold war. The US and the USSR were the two players, who could choose between not attacking the other nation (to cooperate) and being the first to strike (to defect). That the conflict never escalated can be (partially) explained by the negative consequences an attack would have had on potential future cooperation, because none of the two parties wanted to start a war.
The prisoner's dilemma is a well-known game in non-cooperative game theory that highlights how the individually rational behaviour of 'players' can lead to an outcome that is suboptimal for all involved. It is a game that is often used to analyze the possibility of cooperation in situations where self-interested individuals interact strategically.
As consumers have no alternative to the monopolist's product (except not buying) the monopolist, as opposed to a firm in perfect competition, can charge a price above marginal costs. Remember that in perfect competition there are so many buyers and sellers that no one can influence the market price, and firms have to price at marginal costs. If a firm in perfect competition decides to price above marginal costs, it will not sell anything, because the consumers have plenty of other alternatives. The lack of alternatives for the consumers in a monopolized market allows the monopolist to charge a higher price, because there will still be consumers interested in buying the good even if the price is above marginal costs. The monopoly price The monopolist is a profit-maximizing firm and will therefore charge a price that maximizes its profits given the market demand. How does the monopolist maximize profits? Profits are the difference between total revenue and total costs. When the monopoly decides how many units to sell it will compare the change in total revenue from selling one additional unit, i.e., the marginal revenue, to the increase in total costs, i.e. the marginal costs of this unit. The marginal revenue of a monopolist is lower than the market price, because to sell more units the monopolist has to reduce the price for all units. As long as the marginal revenue exceeds the marginal costs, producing one additional unit will increase total revenue more than total costs which means that the profit increases. At the unit where the marginal cost of production equals the marginal revenue from selling that unit, the monopolist will cease production. This is because beyond this point, selling more units will decrease profit. The monopolist is able to do this because it has price-setting power. In contrast, a perfectly competitive firm (which is a price-taker) produces units until its marginal cost of production equals the set market price. If a firm in a perfectly competitive market attempted to sell units at the monopoly price (a higher price point at which marginal revenue equals marginal cost, or MR = MC), it would fail to sell any units at all. This is because consumers could simply buy from the firm’s competitors, who sell at a lower price that is equal to marginal cost P = MC. Consequently, the monopolist maximizes its profits at the quantity where marginal costs are equal to marginal revenue (MR = MC). At this point it doesn't make sense for the monopolist to increase or to decrease the quantity. Mathematically, the monopolist maximizes profits <m:omath><m:r>π </m:r></m:omath>with respect to its quantity produced, where Taking the derivative with respect to quantity q and setting the derivative equal to zero, we obtain the following first-order condition: The first two terms on the left-hand side are the marginal revenue and the last term is the marginal cost of the monopolist. Therefore, we obtain the result that at the optimal quantity the marginal revenue (MR) has to be equal to the marginal costs (MC): Let us look at a simple example. Suppose that a monopolist produces at constant marginal costs equal to 2, i.e., <m:omath><m:r>C(</m:r><m:d><m:dpr><m:ctrlpr></m:ctrlpr></m:dpr><m:e><m:r>q) </m:r></m:e></m:d><m:r>= 2</m:r><m:r>q</m:r><m:r> </m:r></m:omath>and faces market demand <m:omath><m:r>q </m:r><m:r>= 8 - </m:r><m:r>p</m:r></m:omath>. We first solve this last equation to get p = 8 - q. Then, the monopolist maximizes profits <m:omath><m:r>π </m:r><m:r>= p*q - C(q) = (</m:r><m:d><m:dpr><m:ctrlpr></m:ctrlpr></m:dpr><m:e><m:r>8 - </m:r><m:r>q)</m:r></m:e></m:d><m:r>q </m:r><m:r>- </m:r><m:r>2</m:r><m:r>q</m:r><m:r> </m:r></m:omath>by taking the derivative with respect to q and solving. The solution for this example shows that the optimal quantity of the monopolist is equal to 3 and the price (which we find by plugging back in into the demand function) is equal to 5. For any quantity below 3, the monopolist can increase its profit by increasing production. If the quantity exceeds 3, the profits begin to decrease as the quantity increases. This is shown in the table below: Price 0 1 2 3 4 5 6 7 8 Quantity 8 7 6 5 4 3 2 1 0 Profit <m:omath><m:r><m:rpr><m:scr m:val="roman"><m:sty m:val="bi"></m:sty></m:scr></m:rpr>π </m:r></m:omath> -16 -7 0 5 8 9 8 5 0 The price that the monopolist charges is higher than the market price in perfect competition (which is equal to marginal costs) and the monopoly quantity produced is lower than the quantity sold in a perfectly competitive market. This means that there are some customers who would be willing to buy the good at a price above marginal costs, but lower than the monopoly price. However, this is not possible in this monopolist’s market. Therefore, there are unrealized gains of trade. The consumer surplus is lower than the consumer surplus in a perfectly competitive market. This loss in consumer surplus is not fully compensated by an increase in profits, which means that there is a deadweight loss. This situation is depicted in the graph below. The deadweight loss, shown in red, is created by the failure of the market to include customers who want to buy above marginal costs but below the monopoly price. The monopoly price, pm, is the price at which marginal revenue from the next unit sold is equal to marginal cost. This produces a quantity qm that is less than the perfectly competitive quantity. If the market were perfectly competitive, the price would be p* and the amount sold would be q*. Figure 1: Deadweight loss from a monopoly market How much the monopoly price will be above marginal costs depends on the price elasticity of demand. If demand is inelastic, which means that a comparatively high increase in the price will cause a small reduction in the quantity demanded, the monopolist can charge a higher price. In the case of an elastic demand the monopolist would lose too many customers by increasing the price and therefore has less ability to charge a high price. The possibility to charge a price above marginal costs is what we refer to when we talk about the market power of a monopoly. The market power of the monopolist can be measured by the Lerner index which is defined as Where <m:omath><m:r>ε i</m:r></m:omath>s the price elasticity of demand. The Lerner index takes a value between 0 and 1, where 0 means that the firm has no market power and has to charge a price equal to marginal costs. The closer the Lerner index is to 1, the more market power the firm has. The higher the absolute value of the elasticity of demand (the more elastic the demand), the lower the market power of the firm. This index shows what we discussed earlier, that the monopolist is able to charge a higher price in markets in which demand is less price-elastic. Why do monopolies exist? There are several reasons why some markets are and remain monopolized. In some markets barriers to entry make it difficult for potential competitors to enter. For example, if one company controls the access to an essential resource, competitors without access to the resource cannot compete in the market. In some situations the government intentionally creates monopolies, as e.g. in the case of patents. A patent grants a temporary monopoly status to the patent holder; patents encourage innovation by guaranteeing that the inventor can earn high profits from the invention for a time. Besides this type of intentional monopoly, the nature of production in an industry may be such that total costs of serving customers are lower if only one firm manages production. If this is the case we call the resulting monopoly also a natural monopoly. An example of a natural monopoly is the utility industry. Utilities such as sewage and electricity are much more efficient if only one firm supplies them and is able to connect them to the local network. If market forces alone were allowed to run the industry, it could result in multiple redundant utilities competing with each other, which would be inefficiently expensive to set up (due to high barriers to entry). Moreover, with only one firm supplying the utility, it’s easier to maintain as there is only one network and not several. Alternatively, because of the high barriers to entry, it’s possible that the first firm to provide the utility service would force all others out of the market and prevent their entry, resulting in monopoly prices and an inefficiently low number of people being served. Thus, governments usually regulate utility industries to ensure they do not charge monopoly prices and fail to serve all customers. Thus, natural monopolies may still be improved in an overall welfare sense if there is some regulation. Further reading As pointed out above, the problem with monopolies is that when the quantity exchanged in a market is lower than it would be under perfect competition, overall welfare is reduced. Therefore, governments are interested in knowing how to regulate a monopoly and reduce the resulting welfare loss. One economist who extensively studied market power and regulation is Jean Tirole. For his work Jean Tirole won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2014. Good to know Pure monopolies are rare, but there are several examples of markets with dominant firms that control a decisive part of the market share. Examples include the market for diamonds (De Beers), eyewear (Luxottica), operating systems (Microsoft), and others. How much market power these firms have does not only depend on their market share, but also on other factors such as e.g. the price elasticity of demand in the market. Therefore, when competition authorities try to determine whether a firm is becoming too powerful and might abuse this power, they do not only take into account the market share of this firm, but rather focus on the possibility of the firm to charge a price above marginal costs.
A monopoly in economics describes a market in which there is only one firm and it does not face any competition. A monopolist is a firm that offers a unique product or service without close substitutes and therefore does not have any competitors. This means that the monopolist has access to the entire market demand and each customer interested in buying the product can only choose whether to buy from the monopolist at the respective price or not to buy at all.
Top Economics Think Tanks and Research Institutes in the US
Click here to browse our economics job listings 1. National Bureau of Economic Research (NBER) Cambridge, Massachusetts The NBER is a non-partisan organization which conducts research into all topics within economics, and disseminates its findings to academics and policy makers. They have a particular focus on quantitative methods, especially the development of statistical measures and the use of quantitative models. 2. Peter G. Peterson Institute for International Economics (IIE) Washington, District of Columbia Another non-partisan research institution, the PIIE focuses on the study of international economic policy, particularly in identifying policy approaches and practical ideas about how the forces of globalisation can be made to be beneficial for people around the world. 3. Brookings Institution Washington, District of Columbia A long-established institution which conducts research into public policy issues in the areas of economic studies, governance studies, foreign policy, metropolitan policy, and global economy and development. <11an>limit:2;categories:jobs|courses|conferences;countries:United States;disciplines:General Economics (JEL A)</11an> 4. Resources for the Future (RFF) Washington, District of Columbia An environmental policy advice organization which conducts research and analysis to provide information to help policy makers craft better policies regarding the use of natural resources and the environment. 5. Public Policy Institute of California (PPIC) San Francisco, California This California-based institution seeks to provide advice in the arena of public policy, including regarding topics such as climate change, correction and criminal justice, economy, governmental reform, health care, higher education, political engagement, and water. 6. American Enterprise Institute Washington, District of Columbia A public policy think tank which advises law makers in Washington in the areas of economics, foreign and defense policy, health care, education, politics and public opinion, poverty studies, and society and culture. 7. W.E. Upjohn Institute for Employment Research Kalamazoo, Michigan This highly specific think tank conducts research in the causes and effects of unemployment in order to assist and support the unemployed, and disseminates their findings to government and to the public. 8. Levy Economics Institute, Bard College Annandale-on-Hudson, New York A public policy research organization providing advice to US policy makers and business leaders, particularly by providing macroeconomic models and analyses of the US economy and other world economies. 9. Urban Institute Washington, District of Columbia A research institution dedicated to reducing hardship among the most vulnerable people in society and promoting opportunities for all, through research into topics such as beginning and end of life, criminal justice, income and wealth, and nutrition. 10. Center for Economic and Policy Research (CEPR) Washington, District of Columbia Originally established in Europe, this research institution branched out to the US to continue its mission to promote high quality economic research and to disseminate its findings to decision makers. The center's network still extends across Europe, bringing together researchers from around the world.
Think tanks are important institutions in the modern world. As the world becomes more globalised, think tanks which can undertake research and advocacy work at a transnational level become essential players in the global scene. Seeing as economics doesn't happen in a vacuum - each country's economic situation affects the political situation of every other country - they are also crucial to the profession (or at least, line of academic study) of most of the readers of this website. But which ones are the ones you should be following? Which think tanks conduct the most groundbreaking, critical economic research? And which one would be the best one to work for, if you ever had the chance to get your feet in the doors of such prestigious institutions? We've taken a look at the best ones in the United States, so you don't have to do the legwork yourself.
Applying for scholarships is different to applying for a Master’s program. We have collected the best and most relevant tips applicable to the different stages of application. 1. Research different scholarship options available Start your research early, as collecting and preparing documents can take a lot of time. It’s never a good idea to have to do everything in the last minute. Some scholarship options will match your personal situation or characteristics better. If you are interested in accessing a list of prestigious scholarships offered by top universities, feel free visit the INOMICS scholarship section. Check out postgraduate scholarship listings here 2. Check if you are eligible Checking whether you match the requirements for a specific scholarship is extremely important. You don’t want to use your time applying to a scholarship you have no chance of getting. If you are not sure whether you qualify or not, contact the scholarship sponsor. Moreover, if you can contact people who have successfully applied to the same type of scholarship, their help or input can be highly valuable. 3. Check in advance all requirements and organize your documents Checking the scholarship requirements and making a list of general/common documents required by multiple institutions will save time and make your life easier during the send-out of applications. As a general overview, the majority of scholarships require the following documents: - CV/ Personal Data - Motivation Letter/Statement of Purpose - Essay/Research Proposal/Writing Sample - Transcript of Records - Test scores (English, GRE, GMAT) - Income Statements/Tutor’s Financial Information - Letters of Recommendation - Special certificates (membership to groups) Make sure to pay attention to the specific requirements for each scholarship, such as form or length, in order to be eligible. 4. Provide relevant and accurate information Be sure you provide all information that is asked for. Missing or badly-presented information will give a bad impression. Check carefully for grammar and spelling mistakes, and strive for an elegant document presentation style. Correct addresses, phone numbers and emails are important, as well as the information you provide about yourself. Irrelevant information may look unprofessional and mark you as the wrong candidate. 5. Provide appropriate references Referees should be chosen carefully. Letters of reference carry significant weight for your application. You should choose people who know you well enough to demonstrate why you are a good candidate for the scholarship. Each letter of recommendation should highlight your qualities, abilities, and experience that can represent a step forward in the selection process. The ideal referee would be a person who is engaged in your field of studies and who knows you personally. It is better to find somebody who knows you, rather than a well-known professor from your university who you have never worked with. A well-considered recommendation letter specific to you has the power to significantly benefit your application. 6. Don’t miss deadlines Deadlines vary according to the scholarship. Marking deadlines in your calendar and planning ahead is important. Research the application process, especially if you need to fulfill a certain schedule for second round of selection or for interview rounds. If you found a scholarship offer on our website, you can easily turn on a deadline reminder and we will send you a message close to the application date. 7. Double check, track your application Before sending an application, check that all required and relevant fields have been completed, that your answers are comprehensible, and that you have proofread your application and signed it. Be careful not to confuse documents if you are sending multiple applications. Some institutions require original documents to be sent by post. In such cases, plan ahead and take into account the time your postal service will take to deliver the application. Finally, track and save copies of your documents. It is far easier to check on your copies folders than to begin your application again from “zero”.
Everyone wants to be admitted to a top university in their favorite location. Potential reputation among employers, high quality of education and the potential boost that they can represent for a professional career make top universities the first priority of thousands of students around the world. One factor makes the decision tough, however: the potential cost it can represent for the student budget. For this reason, it is always good to look into scholarships, whether from the university itself or from a foundation.
In a market, sellers who offer a good or service interact with buyers who do not possess the good and want to acquire it. At each price the sellers decide how many units they want to offer or supply at this price, and the buyers decide how many units they want to buy or demand. The quantity supplied will be higher the higher the market price of the good, whereas the quantity demanded will be lower the higher the market price of the good. At the price at which these two quantities are identical, i.e., at the price at which the quantity demanded equals the quantity supplied, the market is in equilibrium. In equilibrium there are no buyers who would like to buy the good but cannot find a seller, and there are no sellers who would like to sell the good but are unable to find a buyer. This means that at the equilibrium price, the sellers are able to sell exactly the quantity they want to sell at this price and the buyers are able to buy exactly the quantity that they want to buy at this price. If we know the demand and supply in a particular market, we can easily find the market equilibrium by looking for the price at which the quantity demanded is equal to the quantity supplied. For example, suppose that in the market for pencils the market demand is given by the linear demand function <m:omath><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>D </m:r></m:sub></m:ssub><m:r>= 10 - </m:r><m:r>p</m:r></m:omath> and the market supply is equal to <m:omath><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>S </m:r></m:sub></m:ssub><m:r>= 2</m:r><m:r>p </m:r><m:r>- </m:r><m:r>2.</m:r></m:omath> In equilibrium the number of pencils that the sellers want to sell has to be equal to the number of pencils that the buyers want to buy, i.e., quantity supplied has to be equal to the quantity demanded, or <m:omath><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>D </m:r></m:sub></m:ssub><m:r>= </m:r><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>S</m:r></m:sub></m:ssub></m:omath>. For the demand and supply function of our example this means <m:omathpara><m:omath><m:r>10 - </m:r><m:r>p </m:r><m:r>= 2</m:r><m:r>p </m:r><m:r>- </m:r><m:r>2.</m:r></m:omath></m:omathpara> Now we only have to solve <m:omath><m:r>p</m:r></m:omath> to find the equilibrium price which is equal to <m:omath><m:ssup><m:ssuppr><m:ctrlpr></m:ctrlpr></m:ssuppr><m:e><m:r>p</m:r></m:e><m:sup><m:r>* </m:r></m:sup></m:ssup><m:r>= 4.</m:r></m:omath> To find the corresponding quantity, we plug the equilibrium price <m:omath><m:ssup><m:ssuppr><m:ctrlpr></m:ctrlpr></m:ssuppr><m:e><m:r>p</m:r></m:e><m:sup><m:r>* </m:r></m:sup></m:ssup></m:omath>back into the supply or the demand function and obtain <m:omath><m:ssup><m:ssuppr><m:ctrlpr></m:ctrlpr></m:ssuppr><m:e><m:r>q</m:r></m:e><m:sup><m:r>* </m:r></m:sup></m:ssup><m:r>= 6.</m:r></m:omath> Thus, in our market for pencils the equilibrium price is equal to 4<m:omath><m:r>, </m:r></m:omath>and at this price the quantity exchanged is equal to 6 units. This result is also shown in the graph below. The market equilibrium in a perfectly competitive market corresponds to the point of intersection of the supply curve and the demand curve. On the x-axis we have the quantity <m:omath><m:r>q</m:r><m:r> </m:r></m:omath>of the good or service (in our case pencils) and on the y-axis the price <m:omath><m:r>p</m:r></m:omath> of the good. The green line represents the demand curve and shows the quantity demanded at each price (for the graph below the demand function is the same as in the example <m:omath><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>D </m:r></m:sub></m:ssub><m:r>= 10 - </m:r><m:r>p</m:r><m:r>)</m:r></m:omath>. The blue line represents the supply curve (also taken from the example above <m:omath><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>S </m:r></m:sub></m:ssub><m:r>= 2</m:r><m:r>p </m:r><m:r>- </m:r><m:r>2) </m:r></m:omath>and shows the quantity supplied at each price. At the equilibrium price <m:omath><m:ssup><m:ssuppr><m:ctrlpr></m:ctrlpr></m:ssuppr><m:e><m:r>p</m:r></m:e><m:sup><m:r>* </m:r></m:sup></m:ssup><m:r>= 4</m:r></m:omath>, the quantity demanded is equal to the quantity supplied <m:omath><m:ssup><m:ssuppr><m:ctrlpr></m:ctrlpr></m:ssuppr><m:e><m:r>(</m:r><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>D </m:r></m:sub></m:ssub><m:r>= </m:r><m:ssub><m:ssubpr><m:ctrlpr></m:ctrlpr></m:ssubpr><m:e><m:r>q</m:r></m:e><m:sub><m:r>S </m:r></m:sub></m:ssub><m:r>= </m:r><m:r>q</m:r></m:e><m:sup><m:r>* </m:r></m:sup></m:ssup><m:r>= 6)</m:r></m:omath>. Figure 1: Competitive market equilibrium The market equilibrium is also called the competitive equilibrium, because it describes the allocation of goods and services in a perfectly competitive market (see the term for Perfect Competition). In a competitive market where buyers and sellers are price takers, the equilibrium price (and thus marginal revenue) will be equal to marginal costs and each firm makes a profit of zero. The intuition behind this result is that in a perfectly competitive market without barriers to entry, firms will enter as long as they can make a positive profit. As the number of firms increases the market price decreases because new firms introduce excessive supply that cannot be sold at the original market price. Then they must lower prices to sell their stock. This decreases profits until they reach zero and firms have no incentive to enter the market anymore. Figure 2: New equilibrium after a shift in demand Excess demand and excess supply If the market price is not equal to the equilibrium price, the quantity demanded is not equal to the quantity supplied. If the market price is too high (i.e. higher than the equilibrium price), many sellers want to sell, but only few buyers are interested in buying. This means that the quantity supplied exceeds the quantity demanded - a situation called excess supply. Coming back to our example: at the price <m:omath><m:r>p </m:r><m:r>= 6</m:r></m:omath> per pencil, the quantity that sellers want to sell is equal to <m:omath><m:r>2(6) - 2 = 10,</m:r></m:omath> while the quantity demanded is equal to 4 and there is an excess supply of <m:omath><m:r>10 - 4 = 6 </m:r></m:omath>units. So what will happen in this market? There are many sellers who would like to sell at the market price of 6, but are unable to find a buyer. Some of them will start lowering the price in order to be able to sell, because it is still better for them to sell pencils at a price of 5 euros (for example) than not sell anything at all. Sellers will continue to lower their price until the market price reaches 4, the equilibrium price. At this point sellers have no incentive to further reduce their price, because at the price of 4, they can sell exactly the number of units that they want to sell at this price. Conversely, if the market price is too low, many buyers will be interested in acquiring the good, but few sellers will want to sell the good. This implies that the quantity demanded exceeds the quantity supplied and we call this situation excess demand. We can illustrate this situation using our example demand and supply equations. If the market price is equal to 2, the quantity demanded is equal to 8, but the quantity supplied is only equal to 2. The price is so low that it is not profitable for the sellers to sell more than 2 units. This implies that some customers who want to buy the good cannot, because there is no seller who wants to sell to them at the market price. Consequently, the sellers, knowing that there is enough interest in their pencils, will increase their prices until the market price reaches the equilibrium price. In equilibrium, when the quantity demanded equals the quantity supplied, there is neither excess supply nor excess demand. Whenever the market is not in equilibrium, either because the market price is too high (excess supply) or too low (excess demand), the forces of supply and demand will cause prices to adjust and the market price will move towards the equilibrium price. Further reading In the description above we focused on the market equilibrium in a single market. We ignored that in reality there are many markets, one for each good or service that people want to trade. For this reason, what we described in the above article is also sometimes referred to as “partial equilibrium”, because it refers to the equilibrium for only one good and the rest of the economy might not be in equilibrium. General equilibrium theory, on the other hand, takes the interaction between different markets into account and studies how the forces of supply and demand tend to move the economy as a whole towards an equilibrium. The equilibrium in general equilibrium theory is also sometimes called Walrasian equilibrium, named after the French mathematician and economist Léon Walras (1834-1910) who was the first to study and formalize this idea (see Walras, L., “Elements of pure Economics”). Good to know Are the prices we observe when we enter a store competitive equilibrium prices? Not always. First of all, many markets are not perfectly competitive (i.e. some firms or consumers have market power and therefore the prices in these markets are not the prices we would expect to see in a perfectly competitive market). Second, the equilibrium price of a specific good or service depends on many factors (e.g., the price of related goods, i.e. complements and substitutes, the income of the consumers, the costs of the producers, tastes, expectations, and so forth). Many of these factors affect the supply or demand function and change frequently over time. Therefore, the market prices of the goods and services also fluctuate over time and the prices we observe in the shops might be above or below the equilibrium price. But, the situations of excess supply or excess demand are only temporary, and as we know that the prices will move towards the equilibrium price, we expect that the prices we observe will fluctuate around the equilibrium price.
A market is in equilibrium if at the market price the quantity demanded is equal to the quantity supplied. The price at which the quantity demanded is equal to the quantity supplied is called the equilibrium price or market clearing price, and the corresponding quantity is the equilibrium quantity.
Many games in life have a Nash equilibrium of some type, and learning the Nash equilibrium can help economists predict human behavior (at least, when people behave rationally and selfishly in an economic sense). For example, the foundational Prisoner’s Dilemma features one Nash equilibrium. Other games may not feature one, however, particularly games with an unlimited set of possible choices. Put simply, a Nash equilibrium describes a situation in which each person acts optimally given the actions of the others, so that no one wants to change his or her action. The concept is named after the American mathematician John Nash (1928-2005) who formally developed the concept in the 1950s and won a Nobel Prize in Economic Sciences for his work. In many situations we are confronted with different options and have to decide which one to choose. The payoff (or utility) that we obtain from each option depends both on our own decision and on what others decide. For example, if I can commute to work either by car or by metro, how comfortable the car ride is depends on traffic. Meaning, how many others decide to commute by car affects my utility. A situation is a game when two or more decision makers (or players) decide between two or more options, and the players' decisions also affect each other’s payoffs. In a game, each player takes into account the immediate effect of his or her decision on his or her own payoffs and how the other players will react. As we assume that players are rational and their objective is to maximize their own payoff, we know that every player will play a "best response" to the strategy of the others. An action is the best response if it gives the player a higher payoff (or at least the same payoff) than the payoff that he or she can get by choosing any other possible action. The (Nash) equilibrium of a game The Nash equilibrium of the game corresponds to a situation where no one has an incentive to change his or her strategy given the strategies of the others ‒ i.e., when everyone is playing their best response. This implies that in a Nash equilibrium, the actions that people take coincide with the actions that the others think they will take. Given that everyone correctly anticipated what the others would do and everyone chose the best alternative considering the strategies of the others, no one can gain by deviating from their current strategy. In other words, everyone is happy with the decision that they took in view of the others' decisions. An example (coordination game) Let's consider the concept of Nash equilibrium with the help of an example. Suppose there are two friends, Alex and Blake, who decide to meet in the park. Both of them enjoy playing basketball, but neither of them wants to be the one to bring the ball from home to the park. Each of them can choose between two options: either bring a ball from home or not bring a ball. The payoffs in this game could be the following: if no one brings a ball, everyone receives a payoff of zero. If both bring a ball, then everyone gets a payoff of 1. If only one brings a ball, the person who brings the ball gets a payoff of 1, while the other one gets a payoff of 2. We can write down the actions and payoffs in form of a payoff matrix: In each of the four cells displaying the payoffs, the number before the comma corresponds to the payoff of player 1, in our case Alex. The second number describes the payoff of Blake. This means that if both Alex and Blake bring a ball everyone gets a payoff of 1, and so forth. Now let us find the Nash equilibria of this game. To do so, we check what is the best response of Alex for any action of Blake. If Blake brings a ball then Alex gets a payoff of 1 if he also brings a ball and a payoff of 2 if he does not. Consequently, his best response to Blake bringing the ball is not to bring a ball. If Blake does not bring a ball, Alex obtains a payoff of 1 if he brings one and a payoff of zero if he does not. Hence, his best response to Blake not bringing a ball is to bring a ball. Now we can repeat this exercise to find the best responses of Blake and we see that she should bring a ball if Alex does not and should not bring one if Alex does. This means that this game has two Nash equilibria (in pure strategies). In the first Nash equilibrium, Alex brings the ball. In the second one, Blake brings the ball. Why are these action profiles Nash equilibria? Because when Blake does not bring a ball and Alex does, neither is incentivized to change their decision given the decision of the other. That is, because Blake does not bring the ball, Alex brings it himself. Why is both of them bringing a ball not a Nash equilibrium? Because if Alex knows that Blake is bringing a ball, it's not in his best interest to bring one himself. This means that in this situation he can gain (increase his payoff) by changing his strategy. Mixed-strategy Nash equilibrium The game described above is called a coordination game and has two pure Nash equilibria. A mixed strategy equilibrium is a Nash equilibrium in which one or more players randomize. This means that they play each strategy with some probability. In symmetric games (as the one described above) where each player has the same possible actions and the same payoffs associated with each action, the focus is often to find the symmetric mixed-strategy equilibrium. In a symmetric mixed-strategy Nash equilibrium each player assigns the same probability to a particular action. For the symmetric mixed-strategy Nash equilibrium of the game described above, each player assigns a probability of ½ to each strategy. Put differently, if each of them tosses a coin before leaving and takes a ball if the coin shows heads and leaves the ball at home if the coin shows tails, this strategy would be a (symmetric mixed-strategy) Nash equilibrium. Note that in this equilibrium it is possible that they will have 2 balls and it is possible that they will have no ball at all depending on the outcome of the coin tosses. Yet, if Alex knows that Blake will toss a coin to decide what to do, his best response is to toss a coin as well. Further reading Nash equilibrium is not the only solution concept for non-cooperative games. Depending on the information that the players have, how often they interact (i.e. how many time periods) or whether the players choose their actions simultaneously or sequentially, different solution concepts exist. Many of these solution concepts are refinements of the Nash equilibrium as e.g., the Subgame Perfect (Nash) equilibrium or the Bayesian Nash equilibrium (see e.g. “Game Theory: An Introduction” by Steven Tadelis, 2013). Good to know The movie “A beautiful mind” is based on the life of the American mathematician John Nash, who suffered from schizophrenia. His dissertation on non-cooperative games for which he obtained his PhD from the University of Princeton was only 20 pages long.
Nash equilibrium is an important equilibrium or solution concept in non-cooperative game theory. A Nash equilibrium is a strategy profile (i.e. a strategy for each player) in which each player is playing the best response to the strategy of the other(s).
However, in these troubled economic times, it’s increasingly unclear whether GDP remains an appropriate measure. After all, it ignores inequality, still rampant across the Western world; it doesn’t take into account the earth’s dwindling natural resources; and it fails to recognise the rapidly deteriorating environment. With such glaring omissions, should it really be trusted to measure the success of our economies, and by proxy, the quality of our lives? Here we take a closer look at the measurement’s history, the charges it faces, and its future, all in an attempt to better answer the question: is it time to bin GDP? Its birth Russian-born economist Simon Kuznets first developed GDP, initially known as Gross National Product (GNP), in the early 1930s. His design came at the behest of the US government which, during the Great Depression, was seeking a more accurate measurement of economic output to guide its interventionist governmental policy. As economist Kate Raworth describes, 'GDP enabled President Roosevelt to monitor the changing state of the US economy and so assess the impact and effectiveness of his New Deal policies'. A few years later, as America readied itself to enter the Second World War, GNP was again of use. In his book, How to Pay for the War, John Maynard Keynes explained how important aggregate economic statistics like GNP are for converting an industrial economy into a planned military one. Knowing what was available for a country to mobilise was essential to any credible war planning. Interestingly, in the 1934 report Kuznets delivered to US Congress, he warned against the use of GDP as a measure of economic welfare, and placed emphasis on maintaining a clear distinction between the quantity and quality of growth. Economic welfare, he claimed, could only be ascertained if personal distribution of income is known – something GDP does not calculate. In his own words: ‘goals for more growth should specify more growth of what and for what’. His recommendation fell on deaf ears. Economist Moses Abramovitz was something of an anomaly, when in 1959, he cautioned ‘we must be highly sceptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output.’ Such admonishments did little to slow the GDP fan train, which further gathered pace during the Cold War, as growth was seen as the best means of judging which economic ideology - the central planning of the Soviet Union or the free market of the west - could churn out more stuff. Its confirmation as the buzzword of 20th-century economics came in 1999 when the US Commerce Department heralded it as one of the ‘great inventions’ of the last 100 years. Only more recently, particularly since the financial crisis, has criticism of the measurement begun to mount, showing signs that maybe, ninety years after conception, it’s running out of track. The charges it faces One of the most regular criticisms GDP faces centres on what it doesn’t measure - the list is lengthy. Among the most conspicuous absentees are volunteer work and unpaid household labour, the latter perhaps a legacy of its wartime origins. Still, that these are not considered as ‘contributing’ towards the wellbeing of the economy is contentious, and sets a worrying moral tone for any society created using GDP as its yardstick. It's perhaps no coincidence, that it's women that have traditionally carried out these activities. A further concern is what actually contributes to GDP. Take, for instance, crime. Few in their right mind believe that crime is a signifier of a healthy, progressive society. Yet, when it comes to GDP, crime can be very helpful indeed. Consider the scenario: inequality is spiralling, concentrating wealth in the hands of a diminishing few, while increasing the number of those with very little. The disparity then prompts an increase in crime, as it so often does. And yet, for GDP this bears no burden; in fact, it's beneficial. To a growth fundamentalist, only concerned with growth, a smashed window is not seen as violation of basic social rules; it's seen as an opportunity for a glazier to make a new window, turning a profit and paying tax in the process. This logic holds for much crime and extends to the employment of police, lawyers, judges and prison guards that are tasked with dealing with it. The same logic also applies to catastrophes, which are another excellent means of boosting GDP. World War 2 helped drag the US out of an economic crisis, and countless natural disasters - like the Japanese earthquake in 2011 - have boosted economic growth in all corners of the globe, often increasing both production and employment. The environment foots the bill In our age of climate deterioration, the relentless pursuit of GDP growth also comes at a great environmental cost, one that, in the developed world, far outweighs the benefits it brings. The conversion of trees into lumber, of farmland into shopping malls, and most devastating, of fossil fuels into CO2, all underpin GDP growth, contribute to global warming, and are anathema to a sustainable way of living. If the planet is to be preserved in any recognisable state, reliance on GDP as a gauge of progress, welfare, or even health of the economy, will have to be tempered. The question is, do we have alternatives at hand? Thankfully, yes we do. Genuine progress indicator (GPI) is one of the leading candidates to replace GDP and differs in that it also takes into account social and environmental factors. Perhaps unsurprisingly given the above, it therefore defines what we currently consider ‘healthy’ economic growth completely differently. An illustrative example is Canada’s oil-rich province, Alberta. According to a study by the Pembina Institute, between 1961 and 2003 it experienced GDP growth of 500%. During the same time period, GPI performance steadily fell, responding to growing inequality, rising household debt, and an increase in greenhouse gas emissions. Exactly how different the governance of the province would have been if GPI had informed policy instead of GDP is obviously an unanswerable question. It’s safe to say, though, it would have diverged radically. The Index of Sustainable Economic Welfare (ISEW) has also sporadically been used, and includes inequality, crime, pollution and volunteer work in its estimates. How much traction these metrics will gain remains to be seen. What can be said with more certainty is that the management of the world's economies needs transformation. Climate catastrophe threatens all life, and inequality in much of the Western world has been on the rise for decades - GDP accounts for neither. Our measuring stick for progress fails to address two of the biggest problems we face. It makes no sense. It's high-time we heeded economist, Joseph Stiglitz’s, call - made now over a decade ago - to put an end to 'GDP fetishism'. We need metrics that speak to the needs of the twenty first century, not ones that exacerbate them.
Gross Domestic Product, or GDP, is the market value of all goods and services that a country produces in a given year, adjusted - to make it comparable to previous years - for inflation. In many ways, though, it's transcended this rather prosaic definition. It's become the barometer of a country’s progress, an indicator of a land’s prosperity, and the ultimate yardstick for assessing living standards. When growing (at expected rates), politicians refer to it as proof of the success of their policies. And when rates are not met, or, god forbid, GDP growth slows, it’s weaponised by those for whom it’s politically expedient. It has the power to both elect governments and bring them crashing down. In the theatre of politics, rarely is it anywhere but centre stage.