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Showing posts with the label tragedy of commons

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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A Note on Risk-Uncertainty Trade-offs

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There is risk and there is uncertainty. Risk is about factoring a possible positive or adverse occurrence that changes the payoff and in addition there exists a positive probability of the occurrence of the event. Uncertainty is unknown risk. There would be no way of knowing an event happening and its consequent impact either discrete or continuous. Supply chain disruptions due to global wide pandemic with epicentre in the production hub might have a very low positive probability, yet the risk levels would be so low that they would not be factored in. Moreover, the multiplicative nature of the event creates an uncertainty which cannot be factored in. A question like will Olympics happen on schedule is simply not answerable given there is zero clarity on the future directions of the pandemic. The directions of the multiplicative uncertain events often depend on individual motivations and risk assessments and their conflicting nature with the societal assessment and coping with th
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Examining the Nature of Goods

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Economics literature catalogues goods around two parameters, exclusion and rivalry. Rivalry implies whether the good could be shared by more than one agent without having to produce it more. Inferred is the cost of production of the good to the marginal agent is zero. Excludability is all about the ability or lack of it in preventing another agent from consuming the good. Certain goods like air are inherent in being unexcludable.   In fact, air given its abundance, is non rivalrous, in contrast to let us say, a fruit which if had to be shared, has to be produced more. In other words, in case of rivalrous goods marginal production is positive, for non rivalrous goods, marginal production is practically zero.   The above bounds lead to construction of four types of goods. Those goods inherently excludable and non rivalrous like air etc. are called public goods.   Public roads too have similar characteristics and so do national security, defence etc.   However the inherent of non
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