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 tradeoffs 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.