Social Interactions and the Need for Institutions

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

Tragedy of the Commons

fishing example