tag:blogger.com,1999:blog-4900303239154048192.post3163105466264439107..comments2024-03-06T06:34:42.881-05:00Comments on EconoSpeak: Public Works, Economic Stabilization and Cost-Benefit SophistryUnknownnoreply@blogger.comBlogger10125tag:blogger.com,1999:blog-4900303239154048192.post-22586928931031663272014-11-22T18:16:55.967-05:002014-11-22T18:16:55.967-05:00The apple-dollars example is from David Friedman&#...The apple-dollars example is from David Friedman's book "Law's Order" (p. 20). Consider a transfer of an apple from Mary to John and a transfer of $0.75 from John to Mary. Use Kaldor-Hicks to evaluate each part as a "project" with the other part as the "compensation". Using money as the numeraire and the apple transfer as the "project", we see under the assumptions that the transfer of the apple increases social wealth measured in dollars so that is the recommendation based on "efficiency", and the payment of the "compensation" of $0.75 is a matter of "equity" of concern to politician, theologians, and philosophers but not to the professional economist. Now reverse the numeraire taking apples as the numeraire and the transfer of the $0.75 as the "project". Then the transfer of the apple (= "compensation") does not change social wealth = size of the apple pie, but the transfer of the $0.75 increases the size of the social apple pie by 3/4 of an apple so it is the transfer of the $0.75 that is recommended on efficiency grounds by hard-nosed economists while the transfer of the apple is left to politicians, theologians, and the like as a matter of "equity." Thus the outcome of the KH analysis is reversed by a change in the numeraire used to describe the exact same pair of transfers. See the paper for details which can be downloaded here:<br />http://www.ellerman.org/kaldor-hicks-fallacy/David Ellermanhttps://www.blogger.com/profile/07745270420150384771noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-62763728208952275892014-11-07T23:32:46.992-05:002014-11-07T23:32:46.992-05:00Ellerman is not talking about market prices but ab...Ellerman is not talking about market prices but about preferences for one good in terms of another good (including money as a good). John and Mary have difference preferences for apples relative to money.Sandwichmanhttps://www.blogger.com/profile/11159060882083015637noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-19874553681080317912014-11-07T22:39:08.161-05:002014-11-07T22:39:08.161-05:00"Although simple, this is not an intuitively ..."Although simple, this is not an intuitively obvious argument, so Ellerman illustrates it with a very simple example in which John values apples at one dollar each, while Mary values them at 50 cents. Social wealth would be improved if Mary sells an apple to John for 75 cents. Under the Kaldor-Hicks criterion, social wealth would also be improved if Mary lost her apple and John found it, even though Mary receives no compensation. Kaldor-Hicks would deem this an efficiency gain because John could potentially compensate Mary by paying her 75 cents for the lost apple. Measured in apples, though, there has been no change in total wealth because Mary's lost apple exactly balances John found one..<br /><br /> "But using apples as the unit of measurement changes everything. Since John values one apple at one dollar, he also values one dollar at one apple. Mary values a dollar at two apples.Measured in apples, social wealth would be improved if John lost a dollar -- worth only one apple to him -- and Mary, who values the dollar at two apples, found it. John's cost is smaller -- in apples -- than Mary's benefit. But since a dollar is a dollar, if the unit of measurement was dollars, the cost and the benefit would exactly balance leaving no net gain."<br /><br />I don't get this. I would think that the price of apples would play a role here. How does this work our if the market price of apples is 25 cents? What am I missing?Just Wonderinghttps://www.blogger.com/profile/09585192669633768022noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-65483725632231843232014-11-07T07:33:03.466-05:002014-11-07T07:33:03.466-05:00Thanks, Greg, Looks very interesting indeed!
&quo...Thanks, Greg, Looks very interesting indeed!<br /><br />"Project Appraisal for the Keynesian Investment Planner"Sandwichmanhttps://www.blogger.com/profile/11159060882083015637noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-82758524402998134992014-11-07T02:34:11.053-05:002014-11-07T02:34:11.053-05:00You might find this interesting: http://link.sprin...You might find this interesting: http://link.springer.com/journal/10644/32/2/page/1#page-1Anonymoushttps://www.blogger.com/profile/11677815746117897839noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-19757534544412537042014-11-06T18:27:01.882-05:002014-11-06T18:27:01.882-05:00The extent to which public budgets are flexible is...The extent to which public budgets are flexible is an empirical question that economics should have a very well known answer to. It's as if in chemistry somebody said, "Water boils around 200 degrees, right?"<br /><br />Also,<br />"Personally, I'm not pursueded by Ramsey overall"<br />is a very roundabout way of claiming to know how humans will react to climate change for the next 50 years. Thornton Hallhttps://www.blogger.com/profile/11402495641975262697noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-49168377946823050382014-11-06T12:16:11.743-05:002014-11-06T12:16:11.743-05:00"In the real world we're usually somewher..."In the real world we're usually somewhere in the middle, right?"<br /><br />Peter, <br /><br />In what sense could a global climate-economy assessment model be rationalized as "microeconomic"? <br /><br />What I'm trying to convey here is that the conventional cost-benefit analysis at the core of DICEy IAMs is a hybrid whose parts don't add up to a coherent whole, and certainly not one relevant to the issues it is called upon to address. Sandwichmanhttps://www.blogger.com/profile/11159060882083015637noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-37610660376473886602014-11-06T02:29:29.743-05:002014-11-06T02:29:29.743-05:00A couple of quick points, S-man.
First, the disti...A couple of quick points, S-man.<br /><br />First, the distinction between micro and macro analysis of public projects is tricky. Yes, if a project generates employment and increases incomes in the context of an output gap, that needs to be considered. OTOH, to apply that analysis to a single project implies that the public budget is perfectly flexible: if the project is not undertaken that much less money will be spent. But if you had a fixed budget, the size of the budget would be the relevant macro variable and you could ignore macro impacts at the project level. In the real world we're usually somewhere in the middle, right? Incidentally, there has been a big move in developing countries toward the adoption of employment-generating public programs, the biggest being India's National Rural Employment Guarantee.<br /><br />Second, the Ramsey equation for a supposedly ideal discount rate assumes, as you point out, perpetual growth. It is not unreasonable to suppose that climate change could cause a substantial reduction in economic welfare, however, as it kicks into high gear. In that case, Ramsey would have us use a <i>negative</i> discount rate: future costs would count for <i>more</i> today because future people would have lower incomes and a higher marginal utility of money.<br /><br />Personally, I'm not persuaded by Ramsey overall, so I don't get stressed out by this reversal. It's an interesting argument though.Peter Dormanhttps://www.blogger.com/profile/00093399591393648071noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-33945225454526639432014-11-06T01:45:19.327-05:002014-11-06T01:45:19.327-05:00Do the practitioners know about the embedded choic...Do the practitioners know about the embedded choices? One gets the feeling that it is possible to obtain a PhD and not know. It's like never traveling to a foreign country: you'd never know that much of what we consider "normal" is actually uniquely (bizarrely) American. <br /><br />W. Never visited a foreign country (other than Tiajuana). <br />Thornton Hallhttps://www.blogger.com/profile/11402495641975262697noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-76867909941573257522014-11-05T06:59:07.770-05:002014-11-05T06:59:07.770-05:00the use of an interest rate was a way to arbitrate...the use of an interest rate was a way to arbitrate between <i>competing</i> uses of the funds over time<br /><br />which only occurs when a government is facing full employment, which is why it emerged <i>when</i> it did<br /><br />this was the point of Circular A-47, which was to unify the assorted plans of the water-related agencies; therefore it had to weigh discount rates.<br /><br />it should be observed that in any case the federal government <a href="http://books.google.com/books?id=yLVuAgAAQBAJ&pg=PT26&dq=Budget+Circular+A-47" rel="nofollow">largely ignored A-47</a> until the civil rights movement reignited the legitimacy of contesting the principle of federal water resource infrastructure, and the process of public consultation caused the length of planning-permission procedures to explode.Unknownhttps://www.blogger.com/profile/16307937139237652220noreply@blogger.com