Question

Suppose we agree that there is a justification for public policy intervention in encouraging long-term saving for retirement, or reducing the consumption of sugary drinks, or reducing the use of plastic bags.

a. Outline and justify two policy interventions, based on “traditional” (neo-classical) economic analysis.

b. Propose and justify two additional (complementary) policy interventions suggested by insights gained from Behavioural Economics (BE). [Be specific about the BE insights or assumptions you are using.]

Answer 1

Part (a)Neoclassical economics is a broad approach that explains the production, pricing, consumption of goods and services, and income distribution through supply and demand. It integrates the cost-of-production theory from classical economics with the concept of utility maximization and marginalism. Neoclassical economics includes the work of Stanley Jevons, Maria Edgeworth, Leon Walras, Vilfredo Pareto, and other economists.

1933, imperfect competition models were introduced into neoclassical economics. Some new tools, such as indifference curves and marginal revenue curves, were used. The new tools were instrumental in improving the sophistication of its mathematical approaches, boosting the development of neoclassical economics.

In the 1950s, Keynesian macroeconomic theories and neoclassical microeconomic theories were combined. The combination led to the neoclassical synthesis, which has dominated economic reasoning since then.

Summary

• Neoclassical economics primarily concerns the efficient allocation of limited productive resources. It also considers the growth of the resources in the long term, which will allow for expanding the production of goods and services.
• Neoclassical economics integrates the cost of production theory from classical economics with the concepts of utility maximization and marginalism.
• Classical economics states that the cost of production drives the value of a good or service. Neoclassical economics emphasizes demand as a key driver of the value of a product or service.

Assumptions of Neoclassical Economics

There are many branches that use different approaches under neoclassical economics. All of the approaches are based on three central assumptions:

1. People are rational in making choices between identifiable and value-associated outcomes.
2. An individual’s purpose is to maximize utility, as a company’s purpose is to maximize profits.
3. People act independently on perfect (full and relevant) information.

With the fundamental assumptions above, various studies and approaches have been developed. For example, utility maximization can explain the demand for a product or service. The interaction of demand and supply explains the pricing, and thus the distribution of production factors.

Key Concepts of Neoclassical Economics

Neoclassical economics primarily concerns the efficient allocation of limited productive resources. It also considers the growth of the resources in the long term. The growth will allow for expanding the production of goods and services. It emphasizes that market equilibrium is the key to an efficient allocation of resources. Thus, market equilibrium should be one of the primary economic priorities of a government.

lNeoclassical economics also developed studies about utility and marginalism. Utility measures the satisfaction received by consuming goods and services. It states that people’s decision-making over consumption depends on their evaluation of utility. People allocate their incomes to maximize their levels of utility. Thus, utility is a key factor driving the value of a product or service.

Marginalism explains the change in the value of a product or service with an additional amount. Combining the two concepts brings us to the “marginal utility.” Marginal utility refers to the change in utility as a result of an increase in consumption.

The law of diminishing marginal utility states that as the quantity consumed increases, the marginal utility decreases. The marginal utility can even turn negative beyond a certain level of quantity. Thus, the total utility maximizes at the quantity where the marginal utility equals zero.

Part (b) Bussiness Economics theory assumes that people, given their preferences and constraints, are capable of making rational decisions by effectively weighing the costs and benefits of each option available to them. ... Alas behavioral economics explains that humans are not rational and are incapable of making good decisions.

Assumptions of BE

• Society's wants are unlimited, but ALL resources are limited (scarcity) ...
• Due to scarcity, choices must be made. ...
• Everyone's goal is to ake choices that maximize their satisfaction. ...
• Everone acts rationally by comparing the marginal costs and marginal benefits of every choice.

Behavioural economics and policy design: Examples from Singapore

Donald Low

World Scientific, 2011

Analysts of government have frequently noted how Singapore''s policies are grounded in rigorous economics thinking. Policies are designed to be economically efficient even if they are not always popular. This pioneering book takes a different approach. It aims to demonstrate how successful policies in Singapore have integrated conventional economic principles with insights from the emerging field of behavioural economics even before the latter became popular. Using examples from various policy domains, it shows how good policy design often requires a synthesis of insights from economics and psychology. Policies should not only be compatible with economic incentives, but should also be sensitive to the cognitive abilities, limitations and biases of citizens. Written by policy practitioners in the Singapore government, this book is an important introduction to how behavioural economics and the findings from cognitive psychology can be intelligently applied to the design of public policies. As one of the few books written on the subject, it promises to stimulate wider interest in the subject among researchers, policymakers and anyone interested in the design of effective public policies