Week_5_Optimal_Information - EBS2023 Information Economics...

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EBS2023 Information Economics Optimal Information Faculty of Economics & Business Universiti Malaysia Sarawak
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SOCIAL GOALS AND THE ROLE OF THE RATIONAL INDIVIDUAL CBA is based on neoclassical welfare economics CBA embodies (classic) “Liberal” philosophy with following components: 1. individual is fundamental unit of society Individual preferences count 2. rational decision-making by individuals 3. rational individual’s preferences can be meaningfully aggregated in some manner to make social decisions about resource allocation in society
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THE INDIVIDUAL AND SOCIETY Society essentially composed of individuals motivated by self-interest Law and government provide security against equally self-interested fellows Government and society exist to preserve the individual’s rights Individuals acting in enlightened self-interest lead to the maximum common good Public interests are conceived in terms of private well-being
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THE INDIVIDUAL AND ECONOMY Individuals gain satisfaction or utility fromo consumption These individuals have preferences The values or strengths of this utility is manifested in prices formed in the market place The more individuals value or demand or derive satisfaction/utility, the higher the price and their willingness to pay
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THE INDIVIDUAL AND ECONOMY Thus, money valuations express individual preferences
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THE INDIVIDUAL AND ECONOMY Collective Rationality and Aggregation of Money Valuations Basic question is how to aggregate individual money valuations to form collective or social valuations These social valuations are used to make social (collective) decision-making Basic approach is to simply sum the individual money valuations Summation gives net benefits to society
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DISTRIBUTION OF INCOME AND WEALTH Judgements about the distribution of income and wealth are largely implicit in CBA Implicitly, the desired income distribution is the one prevailing at the time of CBA Because money valuations reflect willingness to pay But willingness to pay as reflected by market behavior is a function of ability to pay
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VALUES WHEN MARKETS DO NOT EXIST Individuals’ preferences are measured as prices and willingness to pay Gives the level of economic welfare from consumption Prices and hence values are formed by market activity
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VALUES WHEN MARKETS DO NOT EXIST Sometimes markets do not exist Biodiversity is one example No prices exist in a market that individuals are willing to pay However, prices and willingness to pay can, in principle, be imputed from observed behavior
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SUMMARY TO THIS POINT Benefit-cost analysis is based on neoclassical welfare economics CBA and welfare economics embody the philosophy of individual consumer sovereignty Social economic welfare is assumed to be the sum of self-expressed welfares of all individuals in society Expressed through market prices and WTP
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SUMMARY TO THIS POINT
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