Common pitfalls in economic analysis

Common pitfalls in economic analysis - Common pitfalls in...

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Unformatted text preview: Common pitfalls in economic analysis. There are two pitfalls that should be avoided when conducting economic analysis: the fallacy of composition and the false-cause fallacy. The fallacy of composition is the belief that if one individual or firm benefits from some action, all individuals or all firms will benefit from the same action. While this may in fact be the case, it is not necessarily so . For example, suppose an airline decides to lower the fares it charges on all of its routes. The airline expects to benefit from the fare reduction because it believes the lower fares will attract customers away from other airlines. If, however, the other airlines follow suit and lower their airfares by the same amount, then it is not necessarily true that all airlines will be better off; while more people may choose to fly, each airline will receive less money per passenger, and each airline's market share is...
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