1.9 Conclusion: How good is the model?

In this chapter, we saw how the tools of economics—in particular, game theory—can be applied to understand real-world problems of bargaining between parties that have a conflict of interest.

Because people can do better by cooperating, they have an incentive to find a way to get something more than their next-best alternatives. When someone gets something more than their next-best alternative, they receive a rent. The rent is the incentive to cooperate with other people. The opportunities for people to cooperate and obtain gains from cooperation demonstrated how we can use the principle of interdependence and the principle of doing the best you can.

But we cannot assume that people will always cooperate or that cooperation will result in equal outcomes. Because Bunker owns the firm in which the Worker works, Bunker has the chance to ensure that the Worker receives only a little bit more than their next-best alternative and that Bunker receives most of the gains from cooperation.

In the next chapter, we complicate this outcome. We ask: What would happen if the Worker organized with other workers and could regulate Bunker (or other emission-producing firms)? We also investigate what happens in the real world when we look at questions of environmental justice, examining how people of different incomes, different racial backgrounds, and living in different places are differentially impacted by environmental damage and emissions. We also ask what the government can do in response and whether regulation can help people do better than they otherwise would.

Skill and learning objectives

  1. Reading an analytical graph
  2. Using a game tree
  3. Defining terms
  4. Translating a story into an abstract model
  5. Reading comprehension

Concepts to be learned

  1. Economic actors and doing the best you can
  2. Choices and opportunity costs
  3. Rents and gains from cooperation (exchange)
  4. Conflicts of interest
  5. Institutions as rules of the game
  6. Economy as a social system in the biosphere
  7. A model as a simplification
  8. Principle of interdependence
  9. Feasible frontier

Seeing the Principles in Action

Principle Example Everyday Economics
Interdependence principle Economic outcomes depend on strategic choices people make in different parts of the economy (see Figure 1.1). Identify outcomes in your own life that depend on what you do and on what other people do. How do your outcomes depend on others and how do theirs depend on you?
Doing the best you can principle People make choices that will result in the best outcome for them given what they anticipate others will do in response, much like the Worker in response to Bunker’s choice of emissions. Describe ways in which you do the best you can in your life, such as with your studies, at work, or when interacting with friends. Do you always get your most preferred outcome?
Rules of the game principle The rules of the game—the institutions—govern what people can and cannot do, such as Bunker moving first when the Worker could not. What rules of the game do you play by at school, at work, or in everyday life? In what ways do they limit what you can and cannot do?
Trade-offs and opportunity costs principle People evaluate what they do in comparison to their outside option or next-best alternative, which captures the opportunity cost of one action compared to another, such as the Worker’s benefits from a job elsewhere. Think about times in your life when you evaluated one choice against another. What made you pick one action rather than the other? What did you think your next-best alternative or outside option was? How did that affect your choice?
Principle of gains from cooperation and conflict of interest Cooperation can lead to greater benefits for everyone, but also to competition and conflict over the benefits. Bunker and the Worker both benefit from interacting, and each wants a larger share of the benefits. When have you benefited by cooperating with other people (buying goods, collaborating on a project, and so forth)? Did you do better than you would otherwise have done? Were you happy with how the gains from cooperation were split?
Principle of individual and societal interests When people do the best they can, they may make choices that do not lead to the best outcomes for everyone or for the environment, such as with the Bunker Hill company failing to manage its fire and the resulting lead poisoning. Have you seen people in your own life make choices that undermine the benefits other people achieve or where people, through competing with each other, obtain worse outcomes for everyone? What about situations you’ve seen in the news or on other media that show damage to the environment or the planet because of people trying to get the most they can without concern for others?

References

Atack, Jeremy, and Fred Bateman. “How Long Was the Workday in 1880?” Journal of Economic History 52, no. 1 (1992): 129–60.

Hyman, Louis. Temp: How American Work, American Business, and the American Dream Became Temporary. Viking Press, 2019.