PSCI231 Study Guide - Midterm Guide: Economic Efficiency, Minimax, Business Cycle
SchoolUniversity of Waterloo
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1. What is, “Utilitarianism” and why is it important to the study of business-
Utilitarianism is a usually described as the greatest happiness for the greatest number.
It reflects the action that produces the most happiness for people; meaning that an action
is good if it produces a higher ultility of happiness.
The thoery treats all members of a society equally, balances the inequalities in wealth
between rich and poor people and justifies human acts. For example, consider a single
mother stealing baby formlua. In this case, the mother is not harming anyone else and her
baby is getting the food it needs. The happiness of the mother is justified because her
actions did not harm anyone, and her baby having enough food increases her ulitily. John
S. Mill would focus on the things that give people happiness rather than judeging actions
based on religion and culture.
Critisicsms of utilitariansim can also be made. It is understood that utilitarianism
measures the total hapiness of people. However, it is not not right to assume that two
people will have the same level of utility over something. An example of this can be
depicted in the following scenario. Person A loves horses and buys a new sadle which
gives her a total util of 50. Person B rather, is interested in sports car. Person B is
uninterested in the saddle and would most likely produce a util of about 10. Therefore it
is unpossible to say that levels of utility are compareable amongst people.
Another criticsm of utilitarianism is that it fails to promote individual rights. Say
that a mother likes hitting her child, and while doing so, her level of utility increases.
Utilitarianism would support the mother and justify her acts because she is obtaining an
increasing amont of utility. However, hitting your child repetively is morally and
ethically wrong. But, in this case, according to utilitarianism, the utility gain of the
mother is greater than the utility cost endured by the child.
Utilitarianism is important to the study of business-government relations because
it allows governments to justify the inequalities between rich and poor and it justifies
3. What is, “Social Contract Theory” and why is it important to the study of
Social contract theory suggests that a fair system is where people agree to join, like a
contract they have agreed to. Rawls, the founder of social contract theory explains his
appraoch by using the concepts of the viel of ignorance and the maxi-min principle.
Rawls recognizes that indviduals have a strong sense of self-interest, and so
people have a natural tendency to want to help themselves. However if everyone tried to
better themselves, it would distort society and would be impossible to create a just
system. In the veil of ignorance prinicple, Rawls says that people know the basic facts of
socieity, but do not know who they are. They do not know their sex, whether they will be
rich or poor or smart or dumb, etc., and so people will begin to assume their identities.
Therefore, people are under the veil of ignorance. Under the veil, people are unable to
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select unfair principles because they do not know how the prinicples they chose will
affect them. When you enter into a social contract, you are ultimately agreeing to be apart
of a society were the established rules are designed to govern any sort of social/political
community. You are agreeing to a set of rules that protect and enhance your life, even if
you are at the low part of society. The veil theory tries to promote a unprejudice society
and helps construct it so there is fairness and equality for all. The second principle
included in Rawls social contract theory is the min-max prinicple. This principle is
designed to maximize the success of the person who is worst-off.
Because social contract theory suggests that a society willinginly accepts to live
under the rules and regulations of a particular area, the role of government becomes
crucial. To sustain a compeitive and cooperative atmosphere amongst businesses,
governments must enforce rules and policies to ensure that all business transations and
relationships remain ethical. The role of governments then, is to focus on redistribution
and distributed fairness.
1. What is the, “Normative Theory of Government” and why is it important to the
study of business-government relations?
The normative theory of government is a theory that explains what the
government ought to, or should so. Normative theorists believe that the
government and its policies should promote public interests. This can also be
known as the public interest approach. The public interest is made up of values
and beliefs that vary over time through social and religious type groups. The four
categories used by analysts for government intervention are; economic efficiency,
macro economic stabilization and growth, fairness, and other social objectives.
Economic efficiency is a big rationalization for government intervention.
Economic efficiency is a term which is used widely. During times of economic
pressure, economic efficiency can be defined as a reaction in trying to make the
per capita benefits as high as possible. This goal can be achieved through
increasing the public consumption of goods and services. Normative theorists
believe that governments should monitor economic functionality and whether or
not it is operating appropriately in regards to market growth or failures.
Secondly, macroeconomic policies are designed to ensure the business
cycle is functioning smoothly along with maintaining low unemployment and
inflation rates. The government has to efficiently manage its spending in order to
create more jobs and to stimulate aggregate demand.
Fairness or equity is another important category used by normative
theorists. When talking about fairness, the example of the economic pie, as
discussed in class comes to mind. Economic efficiency makes attempts to increase
the size of the economic pie. Fairness (equity) is how this economic pie is
ultimately distributed throughout various institutions within the state. Ethics,
morality, sanctity of life, and freedom from discrimination are also factors of
fairness; a prime example would be the Canadian healthcare system. The
healthcare policy in Canada dictates that all individuals should receive equal level
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