PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness...

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PUBLIC POLICY FOR FAIRNESS & EFFICIENCY PMAP 8141: Economy, Society, and Public Policy September 12, 2019 Fill out your reading report on iCollege !

Transcript of PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness...

Page 1: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

P U B L I C P O L I C Y F O R F A I R N E S S & E F F I C I E N C Y

PMAP 8141: Economy, Society, and Public PolicySeptember 12, 2019

Fill out your reading report

on iCollege!

Page 2: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

P L A N F O R T O D A Y

Fairness

Creating economic policyPower & efficiency

Economic models

Fixing collective action problems

Pulling policy levers

Page 3: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

2017 − 1980 + 1

“The following table shows the nominal GDP

(in 2015 US dollars)”

r =ln(CPInew

CPIold)

t<latexit sha1_base64="/3kFkCtt6ttXjK8o3FJZnRVsNYc=">AAACM3icbZBNSwMxEIazflu/qh69BItQL2VXBb0IRS/qqYK1QltKNp2twWx2SWbVsux/8uIf8SCIB0W8+h9M2z2odSDw8L4zTOb1YykMuu6LMzE5NT0zOzdfWFhcWl4prq5dmijRHOo8kpG+8pkBKRTUUaCEq1gDC30JDf/meOA3bkEbEakL7MfQDllPiUBwhlbqFM80PaStQDOeSlUeQQvhHtPj2mnWyVnBXZZl/xiR7FpjO0sxK3SKJbfiDouOg5dDieRV6xSfWt2IJyEo5JIZ0/TcGNsp0yi4hKzQSgzEjN+wHjQtKhaCaafDmzO6ZZUuDSJtn0I6VH9OpCw0ph/6tjNkeG3+egPxP6+ZYHDQToWKEwTFR4uCRFKM6CBA2hUaOMq+Bca1sH+l/JrZ3NDGPAjB+3vyOFzuVLzdys75Xql6lMcxRzbIJikTj+yTKjkhNVInnDyQZ/JG3p1H59X5cD5HrRNOPrNOfpXz9Q17lq1O</latexit>

1850 − 1750 + 1

Page 4: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

E C O N O M I C M O D E L S

Page 5: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

Y T H O ?

Why the h*ck am I making you think about game theory?

The world is never this simple!

The predictions are obvious!

Page 6: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

Models purposefully shrink the world so we can measure and

predict things in it

Page 7: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

No economic model can be a perfect description of reality. But the very process of constructing, testing and revising models, forces economists and policymakers to tighten their views about how an economy works. This in turn promotes scientific debate over what drives economic behavior and what should (or should not) be done to deal with market failures.

Sam Ouliaris, IMF

Page 8: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

No economic model can be a perfect description of reality. But the very process of constructing, testing and revising models, forces economists and policymakers to tighten their views about how an economy works. This in turn promotes scientific debate over what drives economic behavior and what should (or should not) be done to deal with market failures.

Sam Ouliaris, IMF

anything

Page 9: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

G O O D M O D E L S

Clear / parsimonious

Identify important relationships

Make good predictions

Improve communication

Useful

Page 10: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

F I X I N G C O L L E C T I V E A C T I O N P R O B L E M S

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Perfectly rational individual behavior can

create irrational and inferior social outcomes

Page 12: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.
Page 13: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

S T A G H U N T

BalaHunt stag Hunt hare

Ani

l

Hunt stag 10, 10 0, 2Hunt hare 2, 0 2, 2

Non-zero-sum Two pure equilibria

Not socially optimal!Mixed strategy

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C O O P E R A T I O N I N S T A G H U N T L A N D

The payoffs for cooperation are greater than the payoffs

for defection

There’s still an incentive to defect

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W H A T S T O P S U S F R O M C O O P E R A T I N G ?

Uneven payoffs Lack of assurance

Dishonesty SelfishnessThese are all rational things that

utility-maximizing people do!

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Altruism

Repetition and iteration

Infinitization Punishment

Norms Institutions

H O W D O W E F I X T H I S ?

Public policy

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Page 18: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

T R A G E D Y O F T H E C O M M O N S

Farmer 2Use water normally Double water use

Farm

er 1 Use

water normally

6, 6 2, 8Double water use

8, 2 3, 3

Page 19: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

I N S T I T U T I O N A L F I X E S

Change payoffs so that normal water use is more valuable

Make water common property

Privatize the water and let one person control it

Page 20: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

P O W E R & E F F I C I E N C Y

Page 21: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

P O W E R

The ability to do what we want in opposition to the intentions of others

Page 22: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

BalaLeft Right

Ani

l Left Live, Live Die, Die

Right Die, Die Live, Live

W H O S H O U L D D E C I D E ?

Page 23: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

P A R E T O E F F I C I E N C Y

No alternative allocation where one person would be better off and

nobody would be worse off

The most economic pie is consumed without taking pieces away from others

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00

Anil’s payoff

Bala

’spa

yoff

5

5

4

4

I,I

I,T

1

T,I1

T,T

2

2

3

3

I,I = Both use Integrated Pest Control (IPC)I,T = Anil uses IPC, Bala uses Terminator

T,I = Anil uses Terminator, Bala uses IPCT,T = Both use Terminator

Bala

Magic bugs (I) Poison (T)

Ani

l

Magic bugs (I) 3, 3 1, 4

Poison (T) 4, 1 2, 2

Page 25: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

T R A G E D Y O F T H E C O M M O N S

Farmer 2Use water normally Double water use

Farm

er 1 Use

water normally

6, 6 2, 8Double water use

8, 2 3, 3

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I S P A R E T O T H E B E S T S T A N D A R D ?

There can be more than one Pareto-efficient allocation (or none!)

There are no rankings

No consideration of power

Page 27: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

C R E AT I N GE C O N O M I C P O L I C Y

Page 28: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

Annual income Tax rate$0–$10,000 0%$10,001–$50,000 10%$50,001–$100,000 20%$100,001–$300,000 30%$300,000–$∞ 50%

She pays 0% on first $10,000 $10,000 × 0% = $0She pays 10% on the next $40,000 $40,000 × 10% = $4,000She pays 20% on the last $30,000 $30,000 × 20% = $6,000Total tax: $0 + $4,000 + $6,000 = $10,000

1: Progressive tax rateIncreasing marginal rates

Jody earns $80,000 a year.

2: Flat tax15% regardless of income$80,000 × 15% = $12,000

Page 29: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

Veil of ignorance

Original position

Page 30: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

FA I R N E S S

Page 31: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

Efficiency

Equity / Fairness / Justice

E F F I C I E N C Y V S . E Q U I T Y

The most economic pie is consumed

It matters who consumes how much of the pie

Page 32: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

I S P A R E T O T H E B E S T S T A N D A R D ?

Page 33: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

F A I R N E S S M A T T E R S

Page 34: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

T H E U L T I M A T U M G A M E

Most rational, most efficient outcome is to accept any offer

But this doesn’t happen!

Page 35: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

T H E U L T I M A T U M G A M E

Page 36: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

W H A T C O U N T S A S F A I R ?

Procedural fairness

Substantive fairness

Veil of ignorance fairness

What the allocation looks like

How the allocation got there

Page 37: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

H O W D O W E D E C I D E W H A T ’ S F A I R ?

Social norms

Page 38: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

L U C K , N O R M S , A N D T A X E S

Page 39: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

L U C K , N O R M S , A N D T A X E S

Page 40: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

Is international trade efficient?

Is international trade just/fair?

Page 41: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

P U L L I N G P O L I C Y L E V E R S

Page 42: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

T R A G E D Y O F T H E C O M M O N S

Farmer 2Use water normally Double water use

Farm

er 1 Use

water normally

6, 6 2, 8Double water use

8, 2 3, 3

Page 43: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

T R A G E D Y O F T H E C O M M O N S

Farmer 2Use water normally Double water use

Farm

er 1 Use

water normally

6, 6 2, 4Double water use

4, 2 1.5, 1.5

50% tax on doubled use

Page 44: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

I S T H A T T A X F A I R ?

Procedurally?

Substantively?

Rawlsianly?

Page 45: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

C H A N G E S I N T A X E S

Firm ownerPay normal tax Hire lawyers for loopholes

Gov

ernm

ent

Moderate tax rate 100, 500 85, 495

High tax rate 150, 450 90, 490

Current policy

Page 46: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

What happens if taxes go up?

Page 47: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

N A S H E S M A T T E R

Government tries to get to (High taxes, Pay normal rate)

Firms hire lawyers

New outcome is worse for everyone

Policies must be a Nash equilibrium

Page 48: PUBLIC POLICY FOR FAIRNESS & EFFICIENCYSep 12, 2019  · Procedural fairness Substantive fairness Veil of ignorance fairness What the allocation looks like How the allocation got there.

H O W T O A V O I D U N I N T E N E D C O N S E Q U E N C E S

Policy change shouldn’t change preferences in bad ways

Policies must be a Nash equilibrium

Israeli daycare NCLB testing ACA part-time hours