Tuesday, January 8, 2008

Trade-Offs Are Everywhere...

Today in class we discussed the first chapter of Harold Winter's Trade-Offs, which explains how economists evaluate social policy. The three step process is as follows:
  1. Identify theoretical trade-offs, in other words, what are the cost and benefits of the policy?
  2. Empirically measure the costs and benefits, and
  3. Recommend policy
As a motivating example, I asked the students in the class what would be the costs and benefits of having a death penalty (which was a bit disconcerting--benefits of the death penalty?). However, this was designed to get the students into EconoMode and ignore any moral implications of said policy. I like to think that appropriate economic analysis of policy requires one to be somewhat detached from the issues at hand (e.g. the value of life estimates after 9/11 come to mind). The students came up with a fairly long list of costs and benefits and saw first hand how these issues are examined.

We then talked about what is the objective of policy. In this course we are concerned with social welfare maximization. In plain English, we put a dollar value on the benefits and costs and choose the policy with the largest spread between the two.

This brings up an interesting issue: what is the appropriate social welfare function? Is making the pie as large as possible the best objective? What about the policy preferences of a dictator? The point is that this exercise is a subjective one, and that a lot of debates about policy are amongst people who have different welfare functions in mind (e.g. death penalty opponents who value life above all else). This is not to say that any one particular welfare function is correct, but that the one we will use is social welfare maximization.

Finally, we discussed trade-offs in social policy, i.e. the idea that there are no perfect solutions and that any proposed policy will have costs and benefits.

Questions for discussion:

  1. Are individuals who leave from relatively restrictive governments revealing a preference for a particular social welfare function? For example, more people leave Cuba for the United States than vice-versa. Does this reveal a preference for the type of policy making occurring in the Unites States versus the type of policy making occurring in Cuba? Discuss.
  2. Suppose an automobile that was perfectly non-polluting was introduced to the market. Would this be beneficial for the environment? Discuss.
  3. Assume we have taken the three steps in evaluating policy and have made a recommendation. Does this mean (from a public choice perspective) that there are no further issues involved? Discuss.

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