Economics, What Is It Good for?

Based on a True Story…

The individuals mentioned in these slides are

fictitious. Any similarity to any person living or
dead is merely coincidental.
 Jane, 29 Years Old, Researcher at the UK Treasury
• The UK government is concerned about the excessive consumption of
alcohol.
• In addition, due to the effects of Covid-19 it is planning to raise substantial
tax revenues to finance the rising debt due to the UK rescue package.
• As part of her role as a researcher in the UK Government, Jane is asked to
evaluate and advise about several options:
• Taxing the consumption of particular alcoholic drinks
• Taxing the production of particular alcoholic drinks
• Taxing all alcoholic drinks by imposing a unit of alcohol tax
 Jane, 29 Years Old, Researcher at the UK Treasury
• The UK government is concerned about the excessive consumption of
alcohol.
• In addition, due to the effects of Covid-19 it is planning to raise substantial
How
tax do I to
revenues evaluate
finance theeach
rising of
debt due to the UK rescue package.
• these
As part ofoptions?
her role as What datain the UK Government, Jane is asked to
a researcher
evaluate and advise about several options:
do I need? Is it better to tax
• Taxing the consumption of particular alcoholic drinks
consumers or impose
• Taxing the production taxes alcoholic drinks
of particular
on producers?
• Taxing What
all alcoholic drinksisbythe
imposing a unit of alcohol tax
trade-off between taxing
one alcoholic drink and
imposing a tax on alcohol
more generally?
Liang , 24 Years Old, Chinese Department of Labour
• The Chinese government is projecting that in 20 years, 67% of all current
human jobs in the Chinese economy will be carried out by robots or
artificial intelligence (AI) algorithms.
• The government is worried about the effect this might have on the
economy, on inequality, and on the general well-being of Chinese citizens.
• Liang is asked to evaluate the impact of these changes on the labour
market with respect to the government’s objectives.
Liang , 24 Years Old, Chinese Department of Labour
• The Chinese government is projecting that in 20 years, 67% of all current
human jobs in the Chinese economy will be carried out by robots or
Artificial Intelligence (AI) algorithms.
• The What is “the
government general
is worried well-
about the effect this might have on the
economy, on inequality, and on the general well-being of Chinese citizens.
• being of Chinese citizens”?
Liang is asked to evaluate the impact of these changes on the labour
How
market withdo I measure
respect to the government's objectives.
inequality? What are
possible ways to mitigate the
effects of the government’s
projections?
 Adaego , 27 Years Old, Economist at Google’s Inomics
• The US Federal Trade Commission’s Bureau of Competition is
building a case against Google.
• Adaego is advising the Google Law Department in their legal
defence.
• Google has to prove that it did not engage in monopolistic
practices.
• Adaego’s main task is to show that in the market Google works
in, Google could not be considered as a monopoly.
 Adaego , 27 Years Old, Economist at Google's Inomics
• The US Federal Trade Commission’s Bureau of Competition is
building a case against Google.
• Adaego is advising the Google Law Department in their legal
defence.
How can I define the market
• Google has to prove that it did not engage in monopolistic
that Google operates in?
practices.
• How do Imain
Adaego’s measure
task is whether
to show that in the market Google works
Google is could
in, Google a monopoly in its as a monopoly.
not be considered
market, when it produces so
many products?
 Antonio , 35 Years Old, Department of Health, Brazil
• As part of the response to the Covid-19 outbreak, Antonio’s department is
trying to analyse what policies the Brazilian government should take to
fight the spread of the disease.
• The government has started imposing social distancing measures in which
people are asked to stay at home as much as possible. But these do not
seem to work.
 Antonio , 35 Years Old, Department of Health, Brazil
• As part of the response to the Covid-19 outbreak, Antonio’s department is
trying to analyse what policies the Brazilian government should take to
fight the spread of the disease.
• The government has started imposing social distancing measures in which
people are asked to stay at home as much as possible. But these do not
Why are the government’s
seem to work.
requests for social distancing
not working? What kind of
policies would yield effective
social distancing outcomes?
 Appstart, App Design/UX Company

• You are part of a team designing an app for a charity organisation.

• Your task is “gamifying” the interactions on the app to increase
contributions.
 Appstart, App Design/UX Company

• You are part of a team designing an app for a charity organisation.

• Your task is “gamifying” the interactions on the app to increase
contributions.

How can “gamifying”

help increase
contributions?

What motivates people to

contribute?
 Appstart, App Design/UX Company

• You are part of a team designing an app for a charity organisation.

• Your task is “gamifying” the interactions on the app to increase
contributions.

I need
some
coffee,
please!
Economics, What Is It Good for?
The End
Positive Versus Normative Questions
 Microeconomics

Microeconomics starts at the level of individual decision-

making

How do people pursue their individual goals?

And aggregates the behaviour of individuals

What happens in equilibrium, where no person could benefit by

changing her behaviour?
 Economics

Goal of economics: to understand how people make choices,

and how those choices affect society

Positive economics: What do people do?

Normative economics: What should people do?

 Economics

Goal of economics: to understand how people make choices,

and how those choices affect society

Positive economics: objective(?)

Normative economics: subjective, depends on notion of

welfare!
LSE Economists

Prof.

Camille Landais
LSE Economists
LSE Economists

Prof.

Camille Landais
LSE Economists

Positive or normative?
● What is the effect of an increase of 1% income
tax on the probability that superstars migrate
away from the country?
● What can we say about this effect on lower
earners?
● How should the government take the results of
this paper into account when setting its tax
policy?
 LSE Economists

Positive or normative?
Positive question ● What is the effect of an increase of 1% income
tax on the probability that superstars migrate
away from the country?
● What can we say about this effect on lower
earners?
● How should the government take the results of
this paper into account when setting its tax
policy?
 LSE Economists

Positive or normative?
● What is the effect of an increase of 1% income
tax on the probability that superstars migrate
away from the country?
● What can we say about this effect on lower
Positive question
earners?
● How should the government take the results of
this paper into account when setting its tax
policy?
 LSE Economists

Positive or normative?
● What is the effect of an increase of 1% income
tax on the probability that superstars migrate
away from the country?
● What can we say about this effect on lower
earners?
Normative question ● How should the government take the results of
this paper into account when setting its tax
policy?
LSE Economists

Dr.

Matthew Levy
LSE Economists
LSE Economists

Positive or normative?
● Are people better off if they know their habit-
formation tendencies?
● Are people aware of their habit-formation
tendencies when they sign up to the gym?
● What accounts for the price schedules of gyms?
● Should the government interfere in the market
for gyms, given the findings of this paper?
 LSE Economists

Positive or normative?
Normative question ● Are people better off if they know their habit-
formation tendencies?
● Are people aware of their habit-formation
tendencies when they sign up to the gym?
● What accounts for the price schedules of gyms?
● Should the government interfere in the market
for gyms, given the findings of this paper?
 LSE Economists

Positive or normative?
● Are people better off if they know their habit-
formation tendencies?
● Are people aware of their habit-formation
Positive question tendencies when they sign up to the gym?
● What accounts for the price schedules of gyms?
● Should the government interfere in the market
for gyms, given the findings of this paper?
 LSE Economists

Positive or normative?
● Are people better off if they know their habit-
formation tendencies?
● Are people aware of their habit-formation
tendencies when they sign up to the gym?
● What accounts for the price schedules of gyms?
Positive question ● Should the government interfere in the market
for gyms, given the findings of this paper?
LSE Economists

Positive or normative?
● Are people better off if they know their habit-
formation tendencies?
● Are people aware of their habit-formation
tendencies when they sign up to the gym?
● What accounts for the price schedules of gyms?
● Should the government interfere in the market
for gyms, given the findings of this paper?

Normative question
 Remember Jane?
• The UK government is concerned about the excessive consumption of
alcohol.
• In addition, due to the effects of Covid-19 it is planning to raise substantial
taxHow do toI evaluate
revenues each
finance the rising debtofdue to the UK rescue package.
• As part of her role as a researcher in the UK Government, Jane is asked to
these options? What data
evaluate and advise about several options:
• do I need?
Taxing Is it better
the consumption to tax alcoholic drinks
of particular
• consumers or impose
Taxing the production taxesalcoholic drinks
of particular
• Taxing all alcoholic drinks by imposing a unit of alcohol tax
on producers? What is the
trade-off between taxing
one alcoholic drink and
imposing a tax on alcohol
more generally?
 Remember Jane?
• The UK government is concerned about the excessive consumption of
alcohol.
• In addition, due to the effects of Covid-19 it is planning to raise substantial
taxHow do Itoevaluate
revenues finance the each of due to the UK rescue package.
rising debt
• As part of her role as a researcher in the UK Government, Jane is asked to
these options? What data
evaluate and advise about several options:
• do I need?
Taxing Is it better
the consumption to
of particular alcoholic drinks
• tax consumers
Taxing the productionorofimpose
particular alcoholic drinks
• Taxing all alcoholic drinks by imposing a unit of alcohol tax
taxes on producers? What
is the trade-off between
taxing one alcoholic drink
and imposing a tax on
alcohol more generally?
Positive Versus Normative Questions
The End
Rationality and Equilibrium,
What Are They Good for?
 Economic Principles

1. Rationality: people decide what to do by weighing all of the

known pros and cons of the different options and picking
the best option
2. Equilibrium: a situation in which everyone is
simultaneously optimising, i.e. when no individual thinks
he/she has another course of available action that is better
for them
Rationality and Equilibrium in the Market
Rationality and Equilibrium in the Market

The demand function results

from the optimising behaviour of
consumers.
Rationality and Equilibrium in the Market
Rationality and Equilibrium in the Market
Rationality and Equilibrium in the Market
Rationality and Equilibrium in the Market
Rationality and Equilibrium in the Market

The supply function

results from the
optimising
behaviour of
companies/firms.
Rationality and Equilibrium in the Market
Rationality and Equilibrium in the Market
Rationality and Equilibrium in the Market

The equilibrium point is

such that the quantity
demanded equals the
quantity supplied.
1. No consumer would like
to buy more.
2. No supplier would want
to produce more.
Rationality and Equilibrium in Game Theory

Pepsi versus Cola

High Price Low Price

High Price $5b , $5b $0.1b , $23b

Low Price $23b , $0.1b $1b , $1b

Rationality and Equilibrium in Game Theory

Rationality: each player

Pepsi versus
maximises profits Cola

High Price Low Price

High Price $5b , $5b $0.1b , $23b

Low Price $23b , $0.1b $1b , $1b

 Rationality and Equilibrium in Game Theory

Equilibrium:
Pepsi versus Cola
Nash—given what the other company is doing, there is
no other strategy that would increase my profits

High Price Low Price

High Price $5b , $5b $0.1b , $23b

Low Price $23b , $0.1b $1b , $1b

Rationality and Equilibrium, What Are They Good for?

The End