Monday, March 19, 2012

I am a Bit Surprised

I am a bit surprised. An economics professor preaching about the public policy efficiencies of the Jimmy Carter presidency, I may have seen it all. But, on the other hand, his liberal jibber jabber did make a lot of sense, I find it hard to think economically and not see how willingness to pay greatly disenfranchises the poor. Since having a lower income relative to others means your ability to pay is limited compared to them, then you by default have less power over the situation than those of higher incomes. Furthermore in a pure willingness to pay system, everything goes to the highest bidder, thus those with the most get the most.

Now then, he proposed a situation where using income transfers both rich and the poor can go through a sort of reverse auction scenario and achieve a more economically efficient outcome. If it is who is willing to accept the least compensation for damages, I.e. who is willing to accept a free ticket or cash for missing their flight, then you give everyone a level playing field. The rich and poor could both wait equally, and even though the rewards may be more enticing to people of lower income, its ok because they are being even more thoroughly compensated then their rich counterparts because they accepted that the reward was worth the damages.

For a guy who likes to compromise this seems to be an excellent way to do so. By being able to quantify your own utility, and being able to auction off damages for compensation, you can achieve much more efficient outcomes than having it be randomly decided.

It’s not a perfect system, but it is most certainly a more efficient one.

To me this poses several questions,

· Are people not the most able to determine their own utility?

· If so, wouldn’t giving them the ability to determine their utility be more optimal than deciding at random?

· And, If so, Why haven’t we applied this to every fiscal problem in the world?

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