Welfare maximisation as a framework?

The more I read political blogs in the lead up to the election, the more I realise that media and politicians like to paint issues in a way where they have arbitrary goals – such as “increasing the domestic sale of New Zealand made goods”.

However, there is no reason to presume that these goals should be the purpose of policy – after all we do not know how or why these goals were formed.  The overall goal of policy should be to improve net happiness in society – a broad, and also relatively arbitrary goal.

Now there is no way that people would agree on the set of policies that would do this.  But if we set ourselves up to achieve a certain “goal” then we are implicitly taking into account the costs and benefits of the policies that will achieve this goal.  In current media and political analysis the focus appears to be on the “good” of a policy or the “bad”, which is fine.  However, they don’t directly try to weigh the two before making a conclusion deciding to either go with one or the other.  This is irritating because it is the weighting of costs and benefits that is the primary purpose of the political party – which implies that the functioning of political parties and the media is not transperant.

Ultimately, it is important to remember that whatever party is in power will have certain value judgments surrounding the weight of these costs and benefits, which will be revealed by the way they discuss certain policies.  We cannot trust a single political party or media organisation to give us these weights and as a result the “goals” that they focus on are misnomers – reducing carbon emissions has a cost, getting people to buy domestic products has a cost, there is no free lunch.

  • Steve

    totally agree… from an economic perspecitive its about maximising total surplus, hence the removal of tarriffs, encouraging of competition etc.

    However part of the question should also be about who bears the cost of the policy? And if it is ‘acceptable’ that this ‘person’ bear that cost? Does the government have the right to force this cost on someone??

    for example, policy may change and/or remove certain property rights. Should the owner of those property rights bear the cost of their loss, or be compensated by the government/taxpayer for the loss of their property rights??

    Sometimes the answer will be yes, they should bear the cost, those property rigths were too much of a priviledge and should never have been assigned in the first place, and the owner knew the risk of losing their property right when those rights were assigned. In other cases, the answer will be no, they should not bear the cost; in which case the property rights owner should be entitled to compensation; i.e. the government should buy the property right before destroying it.

  • StephenR

    One of the arguments in favour of a carbon tax over the ETS – the ETS confers property rights which will be devilishly hard to take away or change…

  • Steve

    yes but an ets means the value is decided by a market, rather than a arbitrary tax. So provided a “manageable” ammount of carbon permits are allocated, it should be result in a more effecient charge for that carbon allocation.

    It will also mean for those manufacturers where “cleaning” up manufacturing is cheaper than the market value of the permits will do so. While this will also happen with a carbon tax, a carbon tax is just an arbitrary value, and does not create the most effecient outcome or appropriate incentives.

  • “However part of the question should also be about who bears the cost of the policy? And if it is ‘acceptable’ that this ‘person’ bear that cost? Does the government have the right to force this cost on someone??”

    True, but how do we value rights? Surely we can place a value on someones intrinsic right for something – as long as we can value it (which of course involves value judgments) we can discuss a trade-off.

    This value stems from the value that people put on this right, and the intrinsic value that society places on the existence of the right doesn’t it?

    “Should the owner of those property rights bear the cost of their loss, or be compensated by the government/taxpayer for the loss of their property rights??”

    Again this is a matter of valuation, as long as the costs and benefits are transparent there will be some choice that is social superior.

    If we don’t want to imply a valuation then we have to rely on possible parteo improvements – if we compensate the losers and the winners are still better off then the policy is a goer.

    “One of the arguments in favour of a carbon tax over the ETS – the ETS confers property rights which will be devilishly hard to take away or change”

    Of course the answer to that would be to cut out free allocations 😛

    “While this will also happen with a carbon tax, a carbon tax is just an arbitrary value, and does not create the most effecient outcome or appropriate incentives.”

    That is if you choose the appropriate quantity – if the quantity chosen is similarly arbitrary then there isn’t an advantage.

    Also if the “price” of carbon is variable this creates risks surrounding investment – and as a result risk averse firms will cut back on investment more sharply than they would of in the face of a equivalent carbon tax.