ANIMATION SCENE 2 I produce and I pollute Because of that, I suffer and will die. An EXTERNALITY is the (positive or negative) impact of an economic decision on any party that is not involved in the decision.
ANIMATION SCENE 6 O: I compensate you. What would the damage be? 3000? 5000? F. ULRICH: 4675 to be precise. WELFARE THEORY: addresses a question whether the market can achieve efficient outcome and if so how?
The festival is worth more to the organizer than the damage that occurs at the farm. - Coase I: if the organizer is allowed to make a festival, then the farmer doesn’t find it worthwhile to pay him enough such that he waives his right to organize the festival. - Coase II: if the organizer is not allowed to make a festival unless the farmer agrees, then the organizer compensates the farmer for the damage. Regardless of what the law says: the outcome is the same the outcome is efficient Slide appears in background or semitransparent where remainder of text appears ANIMATION SCENE 7 COASE THEOREM when trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.
ANIMATION SCENE 9 A sequential game is one of IMPERFECT INFORMATION if a player does not know exactly what actions other players took up to that point. DEMONSTRATOR Drivers don’t take the negative effects on others into account. When they decide whether to go by car or train, they do not think about air pollution, CO2, or noise. Hence the government should close the tunnel and force everybody to take the train.
ANIMATION SCENE 10 PIGOU TAXES Tax them. Increase the price for driving (via gasoline taxes or toll roads) such that the new price reflects all externalities. AE Sounds pretty radical. But the truth is, drivers do not take the negative effects into account. So what is the solution?
VINCENT It would be great for both of companies to use the same technology. VINCENT It would be great for both of companies to use the same technology. MARIA … So we have two choices now: keeping using our own technology or buying license for NEOtech. MARIA … So we have two choices now: keeping using our own technology or buying license for NEOtech. NEOPLAY STAR tech NEO tech STARDISK STARtech 3,1 NEOtech NORMAL FORM STARDISK STARtech NEO tech EXTENSIVE FORM VINCENT If our technology were chosen by both companies it would be the best thing for us… VINCENT If our technology were chosen by both companies it would be the best thing for us… MARIA … If we keep our technology, NEOPLAY would gain from sales if they adopt our standard. MARIA … If we keep our technology, NEOPLAY would gain from sales if they adopt our standard. NEOPLAY STARtech NEO tech STARtech BORIS It’s clear now: STARDISK launched their product. They use their own technology. BORIS It’s clear now: STARDISK launched their product. They use their own technology. DYNAMIC GAME WITH COMPLETE INFORMATION PURE STRATEGIES NASH EQUILIBRIUM If a player chooses to take one action with probability 1 then that player is playing a PURE STRATEGY. NASH EQUILIBRIUM: best action for you given what the others did. COMPLETE INFORMATION: you know which actions can the other player take and what her payoffs are. SUBGAME PERFECTION: when you choose an action, you anticipate what future player will do. GLYGOR …STARDISK will make the first step on the market… but we are also coming! GLYGOR …STARDISK will make the first step on the market… but we are also coming! NEOPLAY VINCENT We will launch the product first VINCENT We will launch the product first DYNAMIC GAME: players move one after the other. NORMAL FORM: representing the game with a matrix. BORIS … What’s good for us is to adopt the same technology as STARDISK! BORIS … What’s good for us is to adopt the same technology as STARDISK! 0,0 COMPLETE INFORMATION: you know which actions can the other player take and what her payoffs are. (3,1)(0,0) (1,3) 3,1 1,3
Alex OperaSoccer Eliana Opera3,10,0 Soccer0,01,3 MIXED STRATEGY NASH EQUILIBRIUM: best mixing of actions given what the others mix. A MIXED STRATEGY is a strategy when a player randomizes among several actions. (3/4) (1/4) (3/4) I would like to go to soccer but I think she would prefer to go to the Opera… Well… I’ll toss two coins Life is actually simple if we randomize… let’s toss these coins: for head-head I will buy tickets to the Opera.
. In the first case, we have the first-move advantage. STARDISK moves first. In this case we have a pure strategy Nash Equilibrium. In the second case, we have a simultaneous-move game and we have a mixed strategy Nash Equilibrium. ANIMATION SCENE III
Eliana MensaPark Alex Mensa Park 1,1 0,0 Focal point FOCAL POINT: is an equilibrium more likely to be chosen by the players because it seems special, natural or relevant to them. “It’s almost lunch time and he could go now to the mensa or… maybe in the park… !” “However I’ll stay here waiting for her… In fact most of the students choose mensa for lunch !”
Imagine that you would have the chance to play a game: if you extract a red candy you get 5000 SFR and for a black one you get 0. How much would you ask for this chance? Let’s see… I think I wouldn’t ask more than 3000…What about you? How much would you ask? For 80% red candies… no less than 4500 francs. What if the box would contain 50% red and 50% black candies? In this case I think I would ask 3500 francs. What about you? Well… with 50% chance to extract a black candy… Better 1500 Francs than nothing! Oh… you don’t ask too much. I would ask 2000 for 25% red candies in the box! 25% red? That’s not too much. I wouldn’t ask more than 500 francs. ANIMATION SCENE 1 BERNOULLI UTILITY FUNCTION: tells you how good a certain amount of money feels.
ANIMATION SCENE 2 Dialog between Daniel and the Mascot. Daniel and the Mascot will show up on full screen. Oh! I’m a risk seeker! RISK SEEKER: Loving the risk. *** RISK AVERSE: Avoiding the risk.
So… plan A and plan B… What’s the probability of getting sick in the next 6 months? I estimate 1/3 probability. And how much would you earn during this term? Probably… 5000 SFR. So if I choose plan A…. Kate’s utility function After 6 months I might have 3350 SFR (if I’m not getting sick) or 3050 SFR if any problem occurs… 1/3 probab CE plan A = 3120 So the Certainty Equivalent with plan A is 3120 And with plan B, if you get sick you will pay the premium and the franchise, having 1600 at the end. CE plan B = 2720 So the Certainty Equivalent with plan B is 2720. My CE with plan B is lower than CE with plan A. I’ll choose plan A. What about you? 5 sec 2 sec 5 sec CERTAINTY EQUIVALENT: amount of money that is as good as the uncertain outcomes.
CE plan A = 3290CE plan B = 3700 So if I’m getting sick I would have at the end 3050 SFR with plan A… … and 1600 SFR with plan B. So my CE for plan B is higher than CE for plan B. I’ll take plan B.
Risk seeking for low probability gains Well… both of us would like to gamble, aren’t we? Demandy draws all the theoretical aspects in 2 seconds. PROSPECT THEORY: describes how people choose between risky alternatives.