Friday, July 03, 2009

Social Planner and Overconsumption

In my last post here, I explained why overconsumption is a problematic concept.

But there is a deeper conceptual issue here. One that goes to the heart of traditoinal welfare economics. It is the presumed existence of a social planner whose objective function embodies the interests of all members of the society. In other words, the social planner chooses the best course of action which maximizes the society's welfare function. Think about this. Other than implicitly assuming that there is an alternative, optimal consumption pattern which maximizes the welfare of society, how could one lament that the actual pattern of consumption involves over-consumption?

But this way of looking at the problem of overconsumption is wrong headed as Jim Buchanan long pointed out in the 1950s. There is no such social planner. To think there is is to commit the error of the fallacy of composition, that if at the individual level, the chooser picks among alternative choices within constraints, then this must also be true for the society as a whole.

There is another way to think about overconsumption and that relates to incentives. And that is the modern way of thinking about over-consumption. Individuals' might under-consume or over-consume if the consumption of a good generates externalities. (Over-consumption if the externalities are negative and vice-versa) Obesity is a good example. A lot of people lament that more and more people are eating too much resulting in a rising number of obese adults (or even children). The lament usually follows with the complaint that public health resources are being diverted and re-allocated to cure illnesses that are caused by obesity, implicitly ranking those other uses the public health resources are previouly devoted higher than the current ones (used in curing illnesses which result from obesity). In this sense one can then conclude that when people make consumption decisions, they do not take into account the consequences of resources being redirected to cure illnesses resulting from their decisions. Over-consumption thus results.

But let's think beyond this stage. Why I do not take those health consequences into account when I make my consumption decision? Is it because public health services are offered by the government? How can one fail to incorporate such negative health consequences resulting from over-eating if one were to shoulder all medical expenses?

From this perspective, over-eating can only occur with the backdrop of a particular institutional set up, here a public health care system. And if the health care system is privately provided, over-eating stops to be a problem. In other words, in the second way to look at over-consumption as an incentive problem, whether the claim makes sense or not depends on the institutional set up within which individuals make decisions. With private health care, individuals internalize the health consequences of their eating decisions, and over-eating as one manifestation of the phenomenon of over-consumption becomes irrelevant as a public policy problem.

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