2. Microeconomics Policy,
Economic Reasoning, and Beyond 23
How Economists’ Value Judgments
Creep into Policy Analysis
Interpretation of the policymaker’s values
• In practice, social goals are vaguely understood and
vaguely expressed
• Some economists have argued that economists should
recommend only Pareto optimal policies
• Pareto optimal policies are policies that benefit some
people and hurt no one
• Pareto optimal policies don’t exist because every policy
make some people better off and some people worse off
23-2
3. Microeconomics Policy,
Economic Reasoning, and Beyond 23
How Economists’ Value Judgments
Creep into Policy Analysis
Interpretation of empirical evidence
• Economists are trained to be as objective as possible,
but pure objectivity is impossible
• Empirical data are almost always imprecise, and
inconclusive without further research
• Policy debates do not wait for further studies
• Economists’ value judgments influence which incomplete
study they believe is more accurate
23-3
4. Microeconomics Policy,
Economic Reasoning, and Beyond 23
How Economists’ Value Judgments
Creep into Policy Analysis
Choice of economic models
• An economist’s choice of models, which focus on certain
aspects of economic reality, is influenced by value
judgments
• Some economic models are:
• Mainstream neoclassical is presented in the text
and includes the standard supply/demand model
• Marxian (radical) focuses on equitable distribution
of power, rights, and income.
• Public choice focuses on economic incentives as
applied to politicians
23-4
5. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Agreements among Economists
about Social Policy
• Liberal and conservative economists agree on many
policy prescriptions
• They use the same models, which focus on incentives
and individual choice
• Economists are often thought of as “coldhearted,”
because they look at things in an objective way
• Economists consider long-run effects, while the press
and politicians tend to focus on short-run effects
23-5
6. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Economists’ Cost/Benefit Approach
to Government Regulation
• The cost/benefit approach is to assign costs and
benefits, and make one’s decision on the basis of the
relevant costs and benefits
• This requires the determination of a quantitative cost
and benefit for everything, including human life
• Many regulations are formulated for political expediency
and do not reflect cost/benefit considerations
23-6
7. Microeconomics Policy,
Economic Reasoning, and Beyond 23
The Value of Life
• Far from regarding human life as priceless, people make
decisions every day that reflect the valuations they place
on their own lives
• It is clear that people place a finite value on life
• Economists argue that individuals’ revealed preferences
are the best estimate that society can have of the value
of life
• A policy making society shouldn’t pretend that life is
beyond value
23-7
8. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Putting Cost/Benefit Analysis in Perspective
• Cost/benefit analysis is often biased toward quantifiable
costs or it involves ambiguity as nonquantifiable costs
are quantified
• The subjectivity and ambiguity of costs are reasons
why economists differ in their views of regulation
• Regulations will often change other things, too:
minimum wage is an example
• If firms replace workers with machines in one
industry, employment in the machine industry might
rise
23-8
9. Microeconomics Policy,
Economic Reasoning, and Beyond 23
The Cost/Benefit Approach in Context
• In an economist’s framework:
• Self-seeking activities often prevent well-intentioned
policies
• Short-term policies that relieve immediate problems
often have long-term negative consequences
• Politicians have more of an incentive to act fast
than to use the cost/benefit approach
23-9
10. Microeconomics Policy,
Economic Reasoning, and Beyond 23
The Cost/Benefit Approach in Context
• Cost/benefit analysis is an application of the
supply/demand model
• The supply curve represents marginal costs
• The demand curve represents marginal benefits
• Equilibrium of demand and supply in competitive markets
achieves economic efficiency
• Economic efficiency is when a goal is achieved
(producing a specified amount of output) at the
lowest possible cost
23-10
11. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Failure of Market Outcomes
• Failure of market outcomes occurs when, even though
the market is functioning properly (there are no market
failures); the market is not achieving society’s goals
• Three types of market failure:
• Failures due to distributional issues
• Failures due to rationality problems of individuals
• Failures due to violations of inalienable or at least
partially inalienable rights of individuals
23-11
12. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Failure of Market Outcomes
Distribution issues
• The market doesn’t necessarily distribute consumer
surplus as we’d like it to:
• The U.S. has luxury goods but not enough health
care for the poor
• In some African countries, almost 30% of the
population has AIDS, but most don’t have the
money to get the necessary drugs
• The sole purpose of society is not necessarily to maximize
consumer and producer surplus; societies integrate other
goals into the market
23-12
13. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Failure of Market Outcomes
Consumer sovereignty and rationality problems
• The supply/demand framework assumes individuals are
rational, that what individuals do is in their own best
interest
• Rationality failure of individuals is that sometimes we are
irrational and do things that aren’t good for us
• Governments can intervene to get people to do what’s
good for them
• Governments levy sin taxes, which are taxes that
discourage activities society believes are harmful (sinful)
23-13
14. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Failure of Market Outcomes
Inalienable rights
• By definition, inalienable rights cannot be sold, or given
away, so there can be no weighing of costs and benefits
• If one right conflicts with other rights, society, not the market,
must make a moral judgment about which right has priority
• Some trades are not allowed because of inalienable rights:
• Coercive trade such as “your money or your life”
• Prostitution, selling body parts, and selling babies
• Moral judgments underlie all policy prescriptions
23-14
15. Microeconomics Policy,
Economic Reasoning, and Beyond 23
Government Failure
• Failure of market outcomes does not necessarily call for
government action
• For the government to correct a problem, it must:
• Recognize the problem
• Have the will to do something positive about the
problem
• Have the ability to do something positive about
the problem
• Government seldom can do all three of these well
23-15
