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Option 2: Voting
• voting to reveal welfare
o individuals judge their own interests
How can voting reveal welfare? o majority may be better off
• voting
• pareto principle
• potential compensation (Kaldor-Hicks)
What are the three ways to represent the
public interest?
• Potential Compensation (Kaldor-Hicks)
o If we could pay the losers from the
What is potential compensation? gains of the winners then the policy is
a kaldor hicks improvement
o Government favors groups that get
them elected!
• Social Benefit Cost Analysis: employs potential
compensation criterion
• Does not address equity questions
What is the trouble with a fee/tax in Even though a fee does not affect net benefits, it
measuring net benefit? may be higher than the lower end of willingness to pay
and change behavior to change net benefits
Full employment: labor is a COST, could be
working elsewhere – opportunity cost
How are fees counted to outsiders, and how WTP people with standing: benefits
are WTP of people with standing counted? WTP people w/o standing: not counted
the program only covered basic health for poor people, not her
transplant
if it did cover transplants, would become a black hole of funding
What were problems with Diana Brown plus lots of transplants fail, so there is no guarantee
the cost of the procedure is a lot, but clearly less than the value
case? we put on life (in cost benefit analysis)
then why not just fund it?
Money could be used elsewhere – many more units of pre-natal care,
for example
There are inescapable tradeoffs: it isn’t just how much we value
something, but what else we could do with the money
There is a constrained pool of money
A statistical life
the question is NOT what is your life worth to you?
Rather the question IS what is it worth to you to reduce chance of
death?
What is the value of life? What is it worth to society to reduce chance of death?
think of all we could do to save lives (ex: ban cars) but is it worth it?
What is our willingness to pay?
•
o phasing of survey affects the response
o information/knowledge affects response
o strategic misrepresentation
What are problems with measuring WTP o low probabilities are hard for us to think about
(contingent valuation?) o equity: poor count less
o chance of death is 2%- how much are you willing to
pay for a program which will improve neonatal care
and reduce risk of morality by 6%
never really less than 1 million
discounted future earnings: low estimates depending on age ~ 1
million (in 1990 dollars) for an infant
Revealed preference for consumers (?): approximately 1 million (in
How do we estimate the value of a life? 1990 dollars)
Revealed preference for wages for labor risks: < 1 million to > 3
million (1990 dollars)
Willingness to pay for safety < 1 million to > 15 million (1990 dollars)
Vicusi (1993) reasonable studies cluster in the 3 million to 7 million
range
Government agencies use a variety of estimates
o EPA 6.1 million
o DOT (includes FAA) 3 million
FDA 5 million
COPENHAGEN CONSENSUS ranked world problems in order of
return to investment
Assumption: we have a fixed pie of resources to allocate to world
problems
What are inescapable tradeoffs in valuing Winners: AIDS, vaccinations, malaria, water
Losers: global warming
life? (talk about Copenhagen Consensus0 Very controversial because this affects everyone: AIDS does not
had an operating value of ONE LIFE – not valuing a western life
more than an African life
people got very upset because a lot of problems (many in Africa) got
more attention/would get more money than ones that affect us
Three Choices
Do nothing
Invest in stock market (to try and increase value of
What are our choices and uncertainties with holdings, support ore ppl)
social security? Privatize (no longer government’s responsibility)
Key Uncertainties
o Future stock returns
o Future economic growth
Cognitive biases
Miscommunication
What are problems with soliciting opinions
(judgmentsl, probabilities) from experts?
What is the CME?
The certain monetary value – the money we are
willing to take FOR SURE rather than taking the
gamble.
What is the difference between risk averse Risk averse means we like to AVOID risk – so our
and risk seeking? CME is lower – you don’t have to pay us as much to
avoid the risk
• Stakes for each government decision are relatively small for the
government
• Exception: war, social security
• When should governments accept risk aversion of citizens?
Should governments be risk averse? • When should governments act risk neutral?
• Are governments risk averse?
o Are politicians risk averse, are bureaucrats risk
averse?