Social Interactions and the Need for Institutions

Introduction

The classical constitutional conundrum begs the question: how can social interactions be structured so that people are free to choose their own actions while avoiding outcomes that none would have chosen? In other words, how can Pareto-efficient outcomes be ensured? The problem with policy designed to address this conundrum lies in the difficulty in ranking outcomes, especially when Pareto-inefficient outcomes are sometimes preferred. Rules governing interactions are needed to account for externalities, or the unintended consequences of actions taken by self-interested individuals. Adam Smith's argues that given appropriate institutional conditions, an invisible hand will influence self-interested individuals to create socially desirable outcomes.

Coordination and Conflict

The concept of the tragedy of the commons, developed by Garrett Hardin, occurs when individuals pursue their own interests to the point where it becomes disastrous for all involved, including themselves.

Tragedy of the Commons

fishing example