Matt Nolan

The equity-efficiency trade-off, what’s the point?

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Sorry about the constant methodology talk lately, rauparaha and me have just have methodology on the mind 😉

I wish to focus on a subject that is a little different than the rationality definition that my esteemed colleague has been looking at. I plan to look at the equity-efficiency trade-off.

The trade-off between equity and efficiency is one of the primary lessons of first-year public economics. It takes two concepts and illustrates how they behave in the framework of scarcity – which is where the trade-off comes from. As long as we have scarce resources there will be an efficiency-equity trade-off.

However, digging a little further, we might ask why does equity matter? A potential answer is that people value equity, and thereby it is something that needs to be taken into account (something that was described here). But if we care about equity because individuals value it, then why can’t we just introduce equity into the individuals utility function – then the optimal choice will automatically take into account the trade-off between our original idea of efficiency and equity and the new solution will simply be – ‘efficient’.

Is there a reason why we are so keen to divide efficiency and equity – and what does this tell us about economics?

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jamesz

Caps on healthcare

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Greg Mankiw reports that a lady in Britain was prevented from supplementing her state-provided healthcare with private care. Apparently the NHS favours equality over efficiency:

Officials said that allowing Mrs. Hirst and others like her to pay for extra drugs to supplement government care would violate the philosophy of the health service by giving richer patients an unfair advantage over poorer ones.

Clearly, this restriction on her ability to spend her money as she sees fit is not allocatively efficient. The policy is also likely to diminish the health of the population, as the rich are no longer allowed to boost their healthcare levels above what is offered by the government. That, in turn is likely to lead to a greater burden on the government run, public healthcare system which lacks good services such as this Dentist In Huntington Beach CA.

The morality of equality must run strongly through the British government for it to prevent spending that would reduce the load on its own health funding. Mankiw has an interesting analogy for those who agree with the government’s policy:

Should a parent who hires an after-school tutor for his child be barred from sending the child to the public schools?

Matt Nolan

The economist’s economic growth bias

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Reading the titles of the last two posts (the birth rate vs the growth rate and growth forecasts and government) I realised that neither rauparaha or myself defined what ‘growth’ we were talking about. Like all economists, we took ‘Growth’ to be synonymous with growth in gross domestic product.

Could this possibly imply that economists such as rauparaha and myself have an inherent bias when discussing normative statements about welfare that points us towards pro economic growth policies – even when there is a hefty trade off in other social values. Do economists focus too strongly on technical and allocative efficiency without taking social efficiency and equity into account?
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Matt Nolan

Growth forecasts and government

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I was just reading a post on forecasts for US economic growth at Econbrowser. In it the author says: “However, even back in December, the White House forecast was slightly more optimistic than the private sector consensus”. This ‘overconfidence’ in the economy seems to have been a common theme in US public sector forecasts over recent years.

Compare this to Treasury forecasts of the New Zealand economy, which have been consistently below the private sector consensus – that is the reason why tax revenues have consistently surprised on the upside in New Zealand.

Here we have two government authorities, one which constantly overstates economic growth and one which understates economic growth. Why do you think we have this difference?

Update:  My brief thoughts are below the flap:

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Matt Nolan

Externalities: A bridge too far

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CPW sent me a link to the following blog post on Econlog. In the post Bryan Caplan mentions an economist from Princeton (Roland Benabou), who argues that externalities provide a bridge between an economists conception of the world, and non-economists concepts. Although this may be a tad over the top (as non-economists place more value in normative statements than economists would ideally), I believe this is an important point insofar as it allows us to generalise our models, to take into account more possible states of the world.

Bryan Caplan puts forward four points of difference that he believes will still exist between economists and non-economists, however I think they were a touch over-cooked, here’s why:
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Matt Nolan

Interest free student loans and compulsory schooling: Is there a better way?

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Recently the two main political parties in New Zealand have announced schemes that aim to, in some ways, help up-skill 16 and 17 years olds. At the same time, National has come out stating that it will leave student loans interest free, but provide a reward for repayments (leading to much debate).

Although these may seem like separate issues, when I look at the economy the issues of youth employment/skills, education, and unemployment/employment are intensely linked. As a result any policy that the parties take up on one of these issues must take into account how it influences these other sections of society.

In this post my aim is to put forward my current belief of what an ideal policy would look like for these three sectors – that’s right, I said policy not policies. Personally I think that all three are so closely linked that we have to use the same or very similar instruments in order to provide the right sort of outcome. Now, this analysis will be unashamedly normative, I’m going to be packing it with value judgments. I will try to make these judgments clear so you can either i) attack me on them, ii) work out where my objective logic may have gone wrong, separate of the value judgments.

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