Principles of Economics Tutorial 6 Macquarie University PDF

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Q1. Substantive Fairness When evaluating whether a particular allocation or outcome is fair, we can make both substantive and procedural judgements. Substantive judgements of fairness are based on the characteristics of the allocation itself, not how it was determined. Consider the society you live in, or another society with which you are familiar. 1.

To make this society fairer, would you want greater equality of income, happiness, or freedom? Why? Would there be a trade-off between these aspects?

First off, it is important to acknowledge that you may have different views on the suitability of the three attributes (income equality, happiness and freedom) for evaluating substantive fairness in society than your peers. Income is easiest to measure. Measures of happiness and freedom exist, but there are differences of opinion on the adequacy of these measures. For example, is freedom a selfreported measure or an objective one? Is it defined as freedom to do certain things or freedom from certain constraints? In principle, one may want to ensure equality across all these measures, perhaps using some kind of index of human welfare. Trade-offs between the three could arise since, for instance, equality of freedom may lead to an unequal distribution of income as individuals make different choices about participating in the labour force. 2. Are there other things that should be more equal to achieve greater fairness in this society? There are many other factors that you may deem as important when making a substantive judgement of fairness in society. For example, wealth (as opposed to income), health outcomes, and educational outcomes.

Q2. Procedural Fairness Procedural judgements of fairness are an evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself. Again, consider the society in which you live, or another society with which you are familiar. How fair is this society, according to the procedural judgements of fairness listed above? Procedural fairness concerns the rules of the game that brought about the allocation, rather than the allocation itself. The textbook breaks down these ‘rules of the game’ that bring about an allocation into three possible aspects: Voluntary exchange of private property acquired by legitimate means: Societies such as Australia have a large and complex set of laws designed to ensure that private property acquired legitimately remains in the hands of the rightful acquirer. Should anyone illegally

take property from another member of society (a violation of procedural fairness), legal action can be used to hold them to account either through criminal or legal proceedings. Equal opportunity for economic advantage: In Australia it is possible for individuals from any background to succeed. There are numerous examples of people who have come from humble backgrounds to become well known and enjoy tremendous rewards. However, unequal access to certain institutions such as private schools and hospitals, which is related to family income, still mean that opportunities can depend on one’s family circumstances. The underrepresentation of many groups (for example, those from low-income households) in highly paid professions and in higher education is evidence for this. Deservingness: The question here is whether the relative status of people in the Australian economy is related to effort they have put into work and study. One could expect a higher degree of social mobility in Australia if this were true.

Q3. Pareto Efficiency Two farmers Anil and Bala are each deciding how to deal with pest insects that destroy the crops they cultivate in their adjacent fields. They have the choice of using either Integrated Pest Control (IPC) or Terminator (T). The payoffs for their choices, in terms of tonnes of crop, are as follows: 1. Define what is meant by a ‘Pareto efficient’ outcome. Which of the four outcomes shown above are Pareto efficient? An outcome is Pareto efficient if nobody can be better off without making somebody worse off. There are three Pareto efficient outcomes in our example: (I, T), (I, I) and (T, I). For these outcomes, it is not possible to find another outcome that has a higher vertical and horizontal axis value. 2. You are told that (T, I) Pareto-dominates (T, T). Do you agree or disagree? Explain your answer. A Pareto dominant outcome is a where at least one party can be made better off without anyone else being made worse off.

Going from (T, T) to (T, I) makes Bala worse off. Therefore (T, I) does not Pareto dominate (T, T), even though (T, I) is Pareto efficient. 3. Why is (T, T) is the only Pareto inefficient outcome? There are three Pareto efficient outcomes: (I, T), (I, I) and (T, I). (T, T) is inefficient because (I, I) Pareto dominates it 4. Will Anil and Bala both be happy to move from the Pareto efficient (I, T) to the "fairer" Pareto efficient outcome (I, I)? What does your answer to this question tell us about the link between equity and Pareto efficiency? By the definition of Pareto efficiency, one Pareto efficient outcome cannot Pareto dominate another Pareto efficient outcome. In this case, moving from (I, T) to (I, I) will make Bala worse off. The concept of Pareto efficiency is very widely used in economics and sounds like a good thing, but we need to be careful with it. The Pareto criterion does not tell us which of the Pareto-efficient allocations is better or fairer. If an allocation is Pareto efficient, this does not necessarily mean we should approve of it.

Q4. Ethics and Economics The arrival of Napster in 1999, followed by other (illegal) peer-to-peer (P2P) filesharing technologies (e.g. LimeWire, Kazaa, etc.), allowed internet users to illegally share unauthorised music and impacted the recorded music industry in a significant way. Sales of recorded music (CD albums and singles) fell dramatically and record labels began pursuing legal action against website services facilitating illegal P2P file sharing, as well as individuals caught infringing music copyright. Since this time, legal streaming services (such as Spotify and Apple Music) have entered the market and industry sales have started to recover but illegal downloading/streaming remains an important concern for the industry – particularly with the potential of block-chain technology to again disrupt the industry. Using your knowledge consequentialism and deontology, discuss some of the ethical issues that relate to illegal downloading. As a reminder, consequentialism states that whether or not an act is morally right depends only on consequences (as opposed to the circumstances or the intrinsic nature of the act or anything that happens before the act). From a consequentialist point of view, the issue is whether the consequence of the introduction of the P2P technologies is good or bad. If the benefit consumers are deriving from the listening to illegally downloaded songs is greater than the cost to the music industry, then the use of P2P technologies reconcile with this school of ethical thinking. From a deontological perspective, the issue is whether illegal downloading itself is right or

wrong regardless of the consequence. If illegal downloading is ‘stealing’ which is considered ‘wrong’ in most societies, illegal downloading does not reconcile with the deontological perspective. Some students may also argue that illegal downloading is not technically stealing as it does not deprive someone else of utility (i.e. everyone can download the same song). Students may also argue that illegal downloading is not stealing as people were simply using the technology to learn about products that they in turn purchase anyway....