Glossary

The goal of any rational person is to maximize gain and reduce loss whether the unit is in terms of money, energy, quality of life, or anything else. Sometimes maximizing gain in some areas increases loss in other areas.

You might be wondering why I have made this topic. I have made this topic to share what I have learned while taking Micro-Economics at Uni, through the lens of a physical scientist (with knowledge in chemistry, engineering, physics, mathematics and biology)

A way to maximize the positive impacts of economic activity and decrease the negative impacts of economic activity is to ensure that the market is at the optimum state. Taxes and subsidies change behavior of consumers and producers, causing deadweight loss when the taxes shift the new equilibrium away from the optimum. Price floors cause a surplus of goods (which is inefficient), price ceilings cause shortages of goods (also inefficient) and limits on trade of beneficial goods causes deadweight loss. In order to raise revenue and reduce deadweight loss the most, a government can ensure that it doesn't put artificial limits on trade and price and taxes economic activity in a way that does not skew behavior too far away from the ideal. Most economic activity has some sort of externality, which is when the economic activity affects non-participants without their consent. The most common externality is pollution. There are 3 ways to reduce pollution: through limits (what the EPA does now), through taxes (such as fuel taxes and CO2 taxes), and through permits to pollute that can be traded (Cap and Trade). Some ways work better than others in certain situations.

Efficiency is not the only thing that economists try to increase, they also want to increase equality. Welfare economics is the scientific and mathematical focus of some economists to ensure the most people benefit the most from economic activity. The trade-off between efficiency and equality means that often an improvement in one hurts the other.

What do you think of the current situation? Is the world at the ideal state, the optimum equilibrium? If not, how do you think the current state can be shifted towards the optimum?

1. Why is this in the debate section? This seems more like a discussion.
2. If the purpose is to show off what you learned in class, then why not create a blog?

This is a blindingly outdated bit of economic theory, as evidenced by the very first line: "The goal of any rational person"

There's no such thing. People have and can use the capacity for rational thinking: but it always competes with emotional reasoning, and a huge set of psychological phenomena. When I studied this, I saw those phenomena sorted into three categories: bounded self-interest, whereby people will sacrifice their own interests to protect people they feel have treated them well, and to punish people they feel have treated them badly; bounded rationality, whereby people rely on 'fallacies' such as optimism, availability, salience and distorting fairness to make decisions; and bounded willpower, whereby even when someone knows exactly what the most efficient decision is, they won't make it come hell or high water.

These have all been studied in various observational and experimental settings, and the consensus is that it is literally impossible for any person to avoid these. Even corporations suffer from this stuff. So efficiency-based economics can be useful when used normatively - i.e. "because of x y and z, we here today should decide to do this for our own financial interest" - but is completely useless if you're looking for a grounded, descriptive theory - i.e. one that tells you what other people and organisations actually do. That also means that it's useless for policymaking, because the assumption that, if left to their own devices, economic actors will tend towards the "ideal state" of complete efficiency is bunkum. They won't. They're not rational.

If you want to study this more (it will make you a better economist), there are loads of theories and terms you could search for, but the way I was introduced to this lovely lot of learning was by way of behavioural economics. In particular, I spent an afternoon spitting lava at a paper called Jolls, Christine; Sunstein, Cass & Thaler, Richard “A Behavioral Approach to Law and Economics”, Stanford Law Review, Vol. 50. 5 (1998), which you can read here (it's free to read online, you only need a subscription to download the PDF - so lurkers who aren't at uni can get at it, if you so wish. It is, however, 80 pages long). The paper is good, but it made me angry because it was so focused on shoehorning reality into a clearly inadequate academic worldview. The fact that this pissed me off so much is highly ironic, given that I was a 3rd year undergrad law student at the time.

1. Most of the post was background but I posed questions open for debate in the last paragraph.
2. The purpose of this thread is to open up a debate about the economy and the environment. These are hot button issues that seem to be ignored in this forum.


"What do you think of the current situation? Is the world at the ideal state, the optimum equilibrium? If not, how do you think the current state can be shifted towards the optimum? "
What I think of the current situation is that it is messed up. The world is most certainly not in its ideal state. I think the current state can be shifted towards the optimum by having the developed nations removing trade and immigration quotas/limits, tariffs, price restrictions, and payroll tax (which impacts the poor the most) and enacting taxes on various forms of wealth that mostly the wealthy possess (stocks, bonds, large inheritance), on undeveloped private land (which means vacant lots downtown get taxed a lot until something is built on them and houses don't get extra tax), and on pollution on all economic activity done anywhere in the world by any legal person (including corporation) that is a member (citizen, resident, or headquarters) of the country enacting the tax. I also believe that all subsidies to companies that do not provide many positive externalities should be ended (the subsidies from the farm bills make food MORE expensive) and that every corporation based in the country with subsidies in the same field as other corporations receiving subsidies should get similar levels of subsidies (which means I think subsidies in general should be reduced). A national sales tax on Veblen Goods and commonly imported luxuries (things not needed for survival) with mostly inelastic demand should be enacted as well. With all this increased tax revenue and decreased expenses, the governments should decrease their deficits and increase spending on education and infrastructure while enacting a "guaranteed minimum income" in the form of housing credits (to replace mortgage subsidies, also works for rent) and nutrition credits (to replace EBT, with all citizens getting a direct deposit every month which pays by nutrient and not by dollar amount, which means junk "food" is not covered and luxury food could cost both nutrition credits and dollars).