Monday, February 27, 2006

Reminder -- What is economics?

People appear to be struggling to find the economics in the Cohen piece. Cohen's argument centers around the tradeoffs associated with the implementation of a specific incentive. As such, it is fundamentally an economic argument.

Just a reminder, here are some of the basic elements of microeconomics.

1) There are agents or decision makers
2) Each agent must make a decision(s) from a set of possible choices
3) Each agent has preferences over the set of choices, or the agent has an objective.
4) Each agent is constrained in its choices. That is, it faces scarcity, so it can't simply choose whatever it wants. As such, the agent faces tradeoffs.
5) Each agent makes choices to maximize its pursuit of the objectives. That is, it makes choices as long as the benefits of the choice exceed the costs, or, more specifically, as long as the marginal benefit of the choice exceeds the marginal cost.
6) Agents respond to incentives. If something changes the marginal benefits or marginal costs of some behavior, agents will adjust.
7) Further, it may be helpful to recall from your micro classes that agents weigh expected benefits and expected costs when faced with uncertainty and they discount future benefits and future costs when making decisions inter-temporally.

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