What this lesson teaches
I can explain how taxes, subsidies, quotas, tradeable permits, provision, rules and public education correct market failure.
Syllabus 9570, 2.3.3(b). Microeconomic Policies: Policy measures including taxes and subsidies, quotas and tradeable permits, joint and direct provision, rules and regulations, public education in achieving efficiency and equity
Make a guess
A canteen moves fruit to eye level and puts desserts at the back. Desserts are still on sale. What is this?
- A tax, because desserts become harder to buy.
- A nudge: it changes how the choice is shown.
- A ban, because it discourages desserts.
Show the answer
A nudge: it changes how the choice is shown.
No option is removed and no price changes. Making fruit easier to see steers choices while leaving people free.
A nudge changes how choices are presented, to steer people towards better decisions without removing options.
A nudge uses what we know about cognitive biases to encourage better choices, without banning options or changing prices much.
Salience: making important information stand out, like large Nutri-Grade labels.
Loss aversion: framing a choice as avoiding a loss, which people respond to more strongly than a gain.
Default options: making the better choice the automatic one, so people must opt out rather than opt in. Nudges are cheap, but their effect can be small, and they must be used carefully so they do not mislead.
- Nudge
- Changes presentation, not options.
- Tools
- Salience, loss aversion, defaults.
Worked example: Encouraging energy savings
A council wants households to compare electricity plans and save money. It can change how information is shown, but not prices.
- Salience: show each plan's yearly cost in large print.
- Loss aversion: say 'You are losing $200 a year on your current plan' rather than 'You could save $200'.
- Default: sign households up for a comparison reminder unless they opt out.
- Measure whether households actually switch and save.
Watch out for this
A nudge forces people to change their behaviour.
A nudge keeps all the options open. It changes how the choice is presented.
Check your understanding
A canteen wants students to eat more fruit. Which option is a nudge rather than a rule or a price change?
- Putting cut fruit at the till and desserts on a back shelf.
- Allowing students to buy at most one dessert from the canteen a week.
- Charging 50 cents more for each dessert sold after 1 pm.
Show the answer
Putting cut fruit at the till and desserts on a back shelf.
Right. It changes how the choice is shown and keeps every option open at the same price.