Article by Leon Shepherd

There is a lot of discussion about which policies are good, or bad, and how to measure them. This first article covers the following perspectives on public policy decision making, through perspectives Pareto, Edgeworth, Kaldor-Hicks, and Okun. We consider efficiency, equality, ‘goodness’, or ‘badness’. We shall later cover specific perspectives, such as Utilitarian, Rawl, and Nozick and Smith.

This article will contain a lot of graphs; I cannot recommend Bellinger’s “The Economic Analysis of Public Policy” enough if you want to read further. However, this will provide a good basic grounding in how to analyse and consider public policies, and whether to implement them. At least, I hope it helps you consider how we should measure whether a policy is helpful, who it helps, and is it good to implement.

The Foundation of Public Policy:

When you begin to consider public policy, we have to consider the basic views of whether a policy is good, and whether we should implement it, and what are the side effects, and who are the stakeholders affected. We can begin with what is considered the fundamental rule of public policy:

The Fundamental Rule of Policy Analysis Adopt a policy if the total benefits are greater than the total costs.

Seems simple, right? But what are the benefits? What are the costs? How do we define greater or worse? If I take $10 from one man, and keeps $4 for myself, and give two other people $3, is this good? I mean, 3 people have benefitted while only one has suffered.

Is it a good policy if I tell you that the victim in this case is rich? How rich does he have to be before you agree it’s okay to take him money to give to other people? Rawl would say that as long

Or does the simple harm of one to benefit others make this a bad policy? Pareto would say that unless the loser were compensated fully (by giving him equivalent of $10), it could not be. Nozick would say it could never be; the loser must choose to do so voluntarily.

So in this case, we must divide our measurements of ‘goodness’ further. There are three factors we can split most policies along to measure them (Bellinger, 2007).

Efficiency: Maximising the greatest welfare for society given scarce resources. Making the overall pie bigger. Equity: Income equality, freedom, minimum standards of treatment, equal rights, equal opportunity. Making sure everyone gets a more equal slice of the pie. Political Practicality: Political, popular support, and legal standing. Making sure that it is legal, and politically possible to touch the pie at all.

The first two are usual economic concerns; the third a practical concern, especially in a democracy. Even if you have the perfect tax plan, you need to get the support of a majority of the legislature and the executive to agree. It is not enough to be right; you need to ‘sound right’, and depending on the country, require the legal system, Constitution, and history to agree. If you’re the leader of a dictatorship, you’d still need to make sure to not generate sufficient popular unrest (revolt) or noble unrest (a coup) to lose your position.

Other language and concerns often alluded to are (Bellinger, 2007):

Rights: A power or privilege that one is entitled to. A level of minimum standards that are acceptable. E.g. The Human Rights Act (U.K.); the U.S. Constitution; the French Constitution. Freedom: A lack of constraints or limits on an individuals’ actions. E.g. freedom of speech, freedom of opportunity, freedom of association. Equality: How to distribute the rights, incomes, legal status, and other aspects of society. Utility: A measurement from the welfare, or how much good, a person receives. E.g. If you have a cheeseburger, and you like it, you have more utility (happiness/welfare) than you did before you had a cheeseburger.

Generally speaking, Libertarians/traditional Liberals consider upholding the rights and freedoms of the individual above that of the collective society; Socialists believe that governments have the right to place the needs of the many above the needs of the few, and Communists believe that only the needs of the many matter. There are many ways to measure how good a policy is, and whether the good outweighs the bad. We shall cover a selection of perspectives in this, and the next, article.

Pareto’s Optimality:

Pareto, an Italian economist, most famous for this Pareto distribution (that 80% of land is owned by 20% of people, and further shown to exist in terms of many social situations; such as dating and wealth inequality) also provided rules for assessing whether a public policy should be implemented.

Pareto Optimality: A situation is Pareto optimal if it is impossible to make any person better off without making at least one person worse off. All possible improvements of mutually beneficial trade must be done. Pareto Improvement: If something can improve someone without making someone else worse off. Can also be achieved if the person who losses receives compensation equal to their loss. Losers must be compensated.

So if there is a redistributive policy where Person X loses $10 of income, but Person Y gains $20 of income benefits, then it is not a Pareto improvement until Person Y compensates the loser, Person X, with worth of $10.

So what is Pareto optimal? If you have $1, and you want a can of coke that costs $0.50 from the producer, and less than that to produce, you can buy that (by your consent). You gain the coke that you believe is worth more than having that $1; the seller gains $0.50 in profit (minus taxes), the producer gains $0.50 from the seller. Everyone has benefitted from this action; everyone believes that they gained from this action. It is Pareto Optimal, and if it can be done, and the people want it to be done, then it must be done to improve society.

Across a society? It’s more difficult to measure. For example, a government to fund education. People, even people who do not want to use this, have to pay for this via taxes. For this to be a Pareto improvement, everyone who pays taxes would have to benefit from this. There are multiple ways to argue this:

Having an educated populace means less crime Having an educated populace means a richer populace, which creates demand for goods (that pay you) and pay taxes (that pay for other services you use). Having an educated populace (hopefully) means a smarter populace; less likely to want democratic or political decisions that will negatively impact your life

Whether or not you agree, there is a general rate of return on investment in education for society, ranging with a return of 8%-9% for society (Psacharopoulos and Patrinos, 2018). You could argue then it is likely Pareto optimal, but not everyone would agree.