Social Utility: preferences for equality/redistribution
Start w/ game about lifeboat

You’re the first mate on the titanic- there’s one lifeboat left w/ 5 spots, and there’s 6 people on deck, including yourself (young, well educated person.) You must pick which person to eliminate:
A 5 year old orphan
A 20 year old IV drug user
A 85 year old grandmother
A 35 year old nurse
and A 55 year old CEO of a fortune 500 company

Point: scarcity- only 5 slots, 6 people,
How do we divide up the use of scarce resources? On what factors did you base your decisions?

How do your decisions match up to the way we distribute health care in the US?

Where would HIV positive person fit into this analysis?
IV drug users and partners is a big population of HIV+/PLWA in US, are relatively poor, maybe some safety net coverage through Medicaid, probably uninsured and gets little to no care (may also be afraid to use the system)

Homosexual males would be in a range of incomes, but what happens to your ability to work and your assets when you are sick often? –> eventually become eligible for Medicaid also, and Medicare through disability

Elderly all covered by Medicare

CEO covered by private insurance
Nurse, may or may not be covered by private insurance, may have a low coverage policy and under insured.

We have a mix of private and public insurance, but largely, the market rations healthcare.

Market allocations

Edgeworth box- don’t worry particularly about the graph, but he concepts are important, so we’ll go through the intuition;

Set-up
you begin w/ a certain share of each of the goods in the economy and so does the other person-
It’s likely that you can be made better off through trading (packed lunch analogy)
Farmer / tailor analogy

The main point is that people will have certain incomes based on their skills. The market has set prices, and given those prices, economists think that people make decisions about buying

People will be making trades that make both of them better off- these are gains from trade

Cost of buying a particular good (health insurance, food, etc...) is you give up income that you could spend buying something else. The “value” of that other good in terms of how it increases your utility. You weigh the increase in utility from buying good A versus the utility you’d get from buying a certain amount of good B (given the relative prices).

Everyone else in society is doing the same thing, which (if there is perfect competition), gets us to an “efficient outcome” in the sense of no one can be made better off without making at least one person worse off. This is the definition of Pareto optimality. Pareto optimality is one way to characterize efficiency- there are no more gains from trade to be made in the economy.

There are many possible pareto optimal outcomes, but we may, as a society, like some of them better than others. We might care about things besides efficiency.

For instance, Michael Jordan owning everything, and you and I owning nothing is pareto optimal. In order to make us better off, we’d have to take away possessions from MJ, which would make him worse off. It might still be something we’d like to do.

First welfare theorem- If (and this is a pretty big if) there is perfect competition, any equilibrium distribution of goods and services is pareto optimal.

Second welfare theorem- if we redistribute wealth in the right way, we can get to ANY pareto optimal equilibrium.

In other words, if we wanted a more equal distribution that was also efficient, we can get there, and the government does not have to find the efficient point itself, just has to redistribute incomes a little.

Market also determines income
wages are different, depending on what type of skills you have. Michael Jordan is worth millions of dollars, teachers in the public schools get very low comparative salaries. That’s because people are willing to pay a lot to watch MJ, not willing to pay a lot to educate children.

We may argue that this situation is less than desirable, but we still spend our $ to watch him play basketball instead of giving $ to the schools.

But, this model does give us a goal or target for society, based on individual’s utility functions. It also tells us that we can reach that goal without a lot of gov intervention, if markets are perfect.

Problems/critiques of the model

Social welfare is based on individual utilities which are only based on goods and services consumed

and

The distribution of wealth is approved of by society (we approve of MJ getting lots of $ and the rest of us nothing).

Utiltarianism - Bentham- not only can we measure people’s utility , we can add it up across individuals (can even weight some individuals more than others)
Modern economics does not usually make such a strong assumption- we generally believe that we can simply rank an individual’s utility (you like this combination of goods better than another combination of goods, and that more of both goods is better). This is ordinal. Cardinal utility is Bentham’s idea, and it also says, not only do I know you like this combination more than the other, I know how much more you like it. And, everyone has the same kind of scale.

Many combinations of utilitarianism notions

But, basic idea is that possessions matter, more possessions are better, people only care about themselves, and society should only care about the sum of those utilities.

Problems w/ ordinal utilitarianism

•abignores social justice
•abdefined only by possessions, ignoring other factors that influence our well-being
•abcash grants are the best way of securing a more equitable result, if that’s what you’re interested in
Social justice and fairness

In ordinal utilitarianism, we might care about income distribution, but is usually b/c of a social welfare - people may be altruistic - the amount of your possessions may affect my happiness (selfish altruism)- the correct amount of redistribution will be based on how many people are alturistic, and how altruistic they are.

Social justice, on the other hand, is based on something outside of preferences, what is “right” - even if no one is altruistic in the society, there is a set of principles (a set of possessions, if you will) that everyone should have at a minimum.

Other proposals
Rawlsian Justice

Vote: Your annual income will be determined by what row you pick and whether I roll odds/even
ODDS ½ pop EVENS ½ pop Total society
a 50,000 0 50,000
b 35,000 10,000 45,000
c 25,000 17,000 42,000
d 20,000 20,000 40,000

People don’t tend to choose the equal income choice- Rawls responds - people aren’t really answering question from behind the veil of ignorance, you know you’ll probably end up in the higher end

What is the most/least “efficient” outcome: where is total social welfare the highest?
What is the most/least “unequal” state?

Okun’s Leaky bucket:
Will be a trade-off between equality and efficiency
In theory; does it hold up in real life?

Rawls
Go behind a veil of ignorance:
You don’t know your current position in society, you could end up very poor (disabled, having HIV/AIDS), etc.... or you could be Bill Gates.

What would be a “fair” distribution of primary goods?

Rights and liberties,
powers and opportunities,
income and wealth
self respect also

result, society is only bettered if the least well-off people in society would be made better off - difference principle

A public strategy of maximin try to maximize the lot of those individuals with the minimum-
giving michael jordan more stuff doesn’t make society any better
Actually, want every to get same distribution of goods

While is probably unreasonable to expect an exactly equal distribution of goods, theory implies that a lot more redistribution should be going on (much of tax and spend is transfers between middle class, not really to lower class- roads, schools, )
Also, health(care) maybe should be considered a primary goodOther conceptions

Do people deserve to keep inheritances?
Rawls says no, we all only deserve an equal chance

Sen- many, many very different moral philosophies all hinge on equality of something
But, what is the right thing to equalize?

Economics divides equity (equal shares of something) into two types
Horizontal - similar people are treated similarly
look in readings for Monday about differences across states in the way PWLA are treated by Medicaid
and vertical - people at the top are close to people at the bottom
progressive tax rates, providing some basic health insurance coverage for poor

cake analogy for dividing spoils - different philosophies

In ordinal utilitarianism, everyone’s utility gets an equal weight
to get to the socially optimal equilibrium, we can try to do several different things
equalize resources (primary goods?)
“ opportunity - try to help w/ factors that are beyond a person’s control
How would helping HIV/AIDS patients fit into this idea?

Implications for health policy
US only industrialized country w/o national health insurance
Increasing health (through health insurance provision) may equalize opportunity

Is health a primary good/ right?
Should we provide health care b/c of the positive externalities?
Should we worry about access (equality of opportunity) to health(care) or the outcome itself?
US doesn’t have- is this the result of a “liberal” government, truly representing the wishes of the majority or b/c of something else? Even if it is the wish of the majority of voters, does that make it right? (If the majority of people believe that individual w/ AIDS deserve to die, is that still a policy we should pursue?)
How would universal coverage affect HIV+ individuals?

Critiques

People might not prefer a maximin strategy- therefore wouldn’t want a total redistribution to equal shares.

More critiques of Rawls
Why not help out the nearly worst off along with the worst off?
How do we know who is worst off?
How do we reallocate?
Do people who are lazy deserve equal shares?
Rawls says yes- our birth determines our attitudes, we don’t necessarily control
Equalizing resources doesn’t solve problem, people might not use them “correctly”
Some people might need more resources than others

Do we help those who are worst off, or those with the most capacity to benefit? AIDS drugs to those HIV+ with lowest CD4 counts or those with highest?

Other conceptions of Utility

Economists are generally agnostic about where preferences / utility / tastes come from

In using ordinal utility as a guide for social welfare, we do not distinguish b/t the preferences of psychopaths or racists other people who would derive pleasure from harming other people
self destructive behavior
focus on goods rather than other values (freedom, honesty, etc...)

Maybe we have more than one utility function depending on the activity- the marginal utility of a particular good may even have a different sign (for one activity it might be a cost, for another a benefit)

Results of ordinal utility theory
If the government is going try and change the equilibrium, it should give cash, not in kind (food stamps, health insurance, etc...)
Consumer sovereignty: people will use the cash to achieve a higher level of utility than the government can achieve by giving them goods.
Less paternalistic

based on one of the following assumptions
we don’t care about the utility of the taxpayer (or charitable giver) - if they want the money to be used in a certain way, we should consider their feelings
we do care about taxpayers, but they do not care about how the money is spent (not likely)
Why should we care? Because preferences exist, and we’re not judging them (comes down to whose preferences you judge- the donor or the recipient)
to make sure people donate money
to improve productivity
if give cash, person will spend it on what he/she likes, and therefore doesn’t need to work (as much).
If give in kind transfer, they will still want to buy the things that they like, but won’t have the cash to do so, so, therefore no work disincentive (as long as we don’t take away the in kind benefit w/ more income)