This document discusses how to encourage environmentally friendly behavior. It begins by outlining principles of decision making: people face tradeoffs; the cost of something is what you give up; rational people think at the margin and ignore sunk costs; and people respond to incentives. It then discusses how to apply these principles to environmental issues by framing tradeoffs, changing incentives through taxes or subsidies, and using nudges like information to influence choices. The key takeaway is that addressing scarcity, incentives, and rational decision making can help shift norms and protect the environment.
8. So What’s Going on and How Do We
Nudge Behavior?
(Chapter 1)
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9. Some Assumptions
Resources are scarce – limited in nature
Economics studies behavior, individual and
societal, about managing scarce resources
Scarcity is a (the?) fundamental assumption
Can apply ideas to environmental questions
10. 9
HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
All decisions involve tradeoffs.
Limited nature of resources means we cannot
do/buy everything
OR
11. HOW PEOPLE MAKE DECISIONS
Labor / Leisure
More labor $ Consumption, but less leisure
time
Less labor More Leisure
Principle #1: People Face Tradeoffs
Resources (time, labor…)
Protect the
Environment
Produce
Consumer Goods
Regenerative Thermal Oxidizer
(RTO) burns VOCs
Power Coating Oven
OR
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HOW PEOPLE MAKE DECISIONS
Society faces an important tradeoff:
efficiency vs. equality
Efficiency: when society gets the most from its
scarce resources
Equality: when prosperity is distributed uniformly
among society’s members
Tradeoff: Greater equality, by redistributing income
from wealthy to poor.
Reduces incentive to work (poor and rich)
Reduces output from potential labor “inefficient”
Principle #1: People Face Tradeoffs
15. 14
HOW PEOPLE MAKE DECISIONS
Decisions require comparing the costs and
benefits of alternatives
The opportunity cost of any item is
whatever must be given up to obtain it.
It is the relevant cost for decision making.
Principle #2: The Cost of Something Is
What You Give Up to Get It
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HOW PEOPLE MAKE DECISIONS
Examples:
The opportunity cost of…
…a movie:
Ticket price but also the time in theater
…Protecting the environment with fuel efficient cars:
smaller space during travels, less range, less safe
than larger polluting vehicles
…Opportunity cost of protecting Cape Fear River
from Gen-X?
Principle #2: The Cost of Something Is
What You Give Up to Get It
Actually what you
would have bought
instead…
17. The Best Things in Life are Free
Really????
Give me an example
There is no such thing as a free lunch.
There is an opportunity cost to everything!
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18. 17
HOW PEOPLE MAKE DECISIONS
Rational people
systematically and purposefully do the best they
can to achieve their objectives. (self interest)
Evaluate costs and benefits of marginal
changes – incremental adjustments to an
existing plan (more to come)
Ignore sunk costs – costs that have already
been incurred (can’t be changed ignore)
Principle #3: Rational People Think at the
Margin
20. Little less…
Little more…
Ignoring sunk costs
“I bought a gallon of milk last month and only used half so I’m not going
to buy any milk this month for my cereal…”
(Gallon is gone, sunk cost, decide today about how much to buy today for
next week…)
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HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the
Margin
85% of UNCW Students
Return
Sources: WINK TV, UNCW, LinkedIn, NBA.com
Extra year of college and
additional skills/job salary
vs. NBA salary
Extra year of college and
additional skills/job salary
vs. low wage job
22. 21
HOW PEOPLE MAKE DECISIONS
Question:
Why do airlines offer discounted “standby”
tickets?
Marginal Revenue (~$40) > Marginal Cost (~$0)
Principle #3: Rational People Think at the
Margin
24. Thinking at the Margin
Question: What’s the marginal utility of the first
newspaper you buy? The second?
What’s the marginal utility of the first soda you
buy? The second?
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25. Applying the principles
Suppose you have a 2004.5 Volvo you just put
$600 worth of tires on and you are pondering
trading the car in for a new car.
On a Sunday drive, the transmission dies. You
can pay $600 to repair it, or trade-in “as is.”
In each of the following scenarios, should you
have the transmission repaired? Explain.
A. Blue book value is $4500 if transmission works,
$3700 if it doesn’t
B. Blue book value is $4000 if transmission works,
$3500 if it doesn’t
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27. Answers
Observations:
The $6000 you previously spent on repairs is
irrelevant. What matters is the cost and benefit
of the marginal repair (the transmission).
The change in incentives from scenario A
to scenario B caused your decision to change.
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28. 27
HOW PEOPLE MAKE DECISIONS
Incentive: something that induces a person to
act, i.e. the prospect of a reward or punishment.
Rational people respond to incentives.
Examples:
Increase in gas prices
More hybrids sold…
More used trucks for sale
When cigarette taxes increase,
teen smoking falls.
Principle #4: People Respond to Incentives
33. People Respond to Incentives
Seatbelts????
Deaths down, accidents up
How could we reduce the number of car
accidents?
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Safe driver discounts
…
Tickets
Insurance Increases
…
Cigarette taxes and “alternatives”…
34. People Respond to Incentives
Average savings at retirement (65) is $103,000
Rule of thumb, pull out 4% per year, $4,120
$343 per month…
Currently:
Tax Income less incentive to work (or report)
How can we incent work and not consumption?
One solution:
Tax consumption, people consume less and
save more
33
http://www.fool.com/retirement/general/2015/01/10/the-typical-american-has-this-much-in-retirement-s.aspx
35. Fixing the Environment
Get the incentives right
Taxes on gasoline
Subsidies for efficient vehicles etc.
Note: Easy to say, hard to do
Federal and State E-vehicle credit was ~$6-8K
Everyone bought golf carts!
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36. A Nudge…
Libertarian – a person who believes in the
doctrine of free will (essentially no gov’t)
Paternalism – a system in which an authority
undertakes to supply needs or regulate conduct
of those under its control
Libertarian Paternalism – influencing behavior
while still also respecting freedom of choice
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40. How to Move People to Be More
Environmental
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41. Options
Nudges…
Did you
know /
information
41
Hole shapes
reduce
cognitive load
more
recycling
42. Options for Env.
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Use economics!
Recall
Resources are scarce Tradeoffs
Rational people think at the margin
People respond to incentives
Get the incentives right
Use nudges to influence behavior too.