Notesale: Turn your study into money

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Behavioural Economics
Problems with Human Decision making
- Bounded rationality: Decision making not always rational because of limits
- Bounded self-control: Do not always stop consuming once benefit no longer exceeds
cost
- Anchoring: Irrelevant info as ref point for estimation
- Altruism: Making decisions not based on self (not maximise personal utility)
- Rule of thumb: General rule to use on numerous occasions to save time as time is
scarcer resource than what is sacrificed using this
- Social norms potentially reduce personal utility
- Availability: Buy inferior product when preference not available
Externalities & Market Failure
- Externality: Side-effect of production/consumption on someone other than
produces/consumer
- MPB: Benefit to consumer only of consuming one more unit
- MSB: Total benefit to society as a whole of one more unit
- MPC: Cost to producer only of producing one more unit
- MSC: Total cost to society as a whole of one more unit
- MEB: Side benefit to someone other than producer/consumer
- CONSUMPTION
o Positive externality of consumption: MSB > MPB (Socially desirable =
underproduction)
o Negative externality of consumption: MPB > MSB (Socially undesirable =
overproduction)
- PRODUCTION
o Positive externality of consumption: MPC > MSC
o Positive externality of consumption: MSC > MPC
- MSC = MPC + MEC
- Total market failure = no market; partial market failure = externality
- NSC = NPC + NEC
= (PC – PB) + (EC – EB)



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