Approaching Social Issues

Trade-Offs: An Introduction to Economic Reasoning and Social

Issues by Harold Winter

The Economic Way of Thinking

• Step 1: Identify the theoretical trade-offs of the issue in question.– This is the costs and benefits step– Regardless of the issue, there are always trade-

offs to consider.• For any policy solution proposed, there will be

proponents and opponents.

Ignoring Personal Concerns

• Economists can argue in favor of drug abuse, theft, and even death.

• Economists can argue against both safer products and pollution control.

“I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.”

Step 2

• Step 2: If possible, empirically measure the trade-offs to determine if the costs outweigh the benefits, or vice versa.

• If you are interested in proposing a policy solution, it helps to have some relative idea of the magnitude of the trade-offs identified in step 1.– How you measure the trade-offs is an important

issue.

Pitfalls in Step 2

• First, empirical analysis requires data.– Often difficult to collect data that is accurate.

• Second, the real world is a big and messy place to study.– Data simply may not be available.

• Third, there are many statistical methods that can be used to measure the trade-offs.– Cheap computers means many different approaches.

• Finally, empirical approaches can differ in statistical techniques, but also in empirical design.– What data are most relevant?

Empirical Work

• It must be necessary to replicate your results.

Step 3

• Step 3: Recommend (or implement) social policy based on the first two steps.– The bulk of public policy economic research is

meant to imply, or recommend, policy solutions.– Some economists step out into the public arena

and make their positions clear (e.g., John Lott, Steven Levitt).

Objectively Speaking

• Many of the academic debates over public policy occur due to the difficulties associated with step 2.– Levitt vs. Lott. Did Roe v. Wade reduce or increase

crime in the 1990s. – It’s an empirical question.• Debate is not over the results, but over how those

results were achieved (what model, what data, the statistical methods used).

Trade-Offs

• The other two steps can pose challenges, too.– It is one thing to say that we are going to identify

trade-offs, but it is another thing to say exactly which trade-offs we are going to identify.

– Only the most relevant trade-offs are usually considered.• This depends on what policy objective is being

considered.

Social Welfare Maximization

• Let’s assume we can identify and accurately measure costs and benefits.– If benefits of the solution outweigh the costs,

adopt the solution.– If more than one solution, select the one with the

greatest net benefits.• This is often referred to as social welfare (or social

wealth) maximization.

Example

• If our policy goal is to maximize social welfare, we want to identify trade-offs that affect social welfare.

• New workplace safety regulation– Benefit: reduce worker injury or death– Cost: resources used to install and maintain the

safety feature. – Once benefits and costs have been identified,

then measure them.

Measuring Trade-Offs

• In measuring trade-offs, it is common for economists to place a monetary value on all the relevant costs and benefits.

• Example– Costs of installation and maintenance of the

safety feature will already be measured in dollars.– On the benefit side, a dollar equivalent can be

established for the value of lives saved or injuries avoided.

Definition of Social Welfare• Even if there is agreement on the broad

objective of maximizing social welfare, policy objectives may differ due to differences in the definition of social welfare.– Economics of crime• Should the benefits that accrue to individuals who

commit crime be added to social welfare?– This is opinion as to whether this benefit should be counted.

• Policy objectives and definitions of social welfare are subjectively determined.

Defining Social Welfare

• What should be counted as social welfare?– Economists tend toward inclusiveness in defining

social welfare.– Economists are concerned about identifying costs

and benefits, but not about who reaps the benefits or incurs the costs.

• Efficiency vs. Equity– We will focus on efficiency, with an occasional

mention of equity considerations.

Winter’s Game Plan• Primary focus will be on step 1.– Identifying trade-offs is the most enjoyable work,

because this is where the policy analysis begins.– The least contentious step among economists.

• Strong agreement over identifying costs and benefits.

• The important debates over empirical work (step 2) is not about the results, but over the data and the statistical techniques used.

• Social welfare maximization is the objective policy makers should care about.