Acknowledgements. Introduction 1 The problem areas 2 Structure and approach 2

Transcription

1 Contents THE ECONOMICS OF SOCIAL PROBLEMS Acknowledgements viii Introduction 1 The problem areas 2 Structure and approach Social Objectives and the Allocation of Resources 5 Scarcity and choice 6 Efficiency 7 Equity 11 Trade-offs between objectives 13 Other objectives 14 The market system 15 The market system and social objectives 21 Government policies 23 Summary 24 Further reading 24 Questions for discussion 25 Health Care 27 Objectives 28 The market system and health care 32 Government policies 38 Government policies and objectives: an assessment 40 Summary 46 Further reading 47 Questions for discussion 47 Education 49 Objectives 50 The market system and education 52 Government policies 58 Summary 65 v

2 vi Contents Further reading 66 Questions for discussion Pensions 69 Objectives 70 The market system and pensions 77 Government policies 80 Summary 87 Further reading 87 Questions for discussion 88 Housing 89 Objectives 90 The market system and housing 91 Government policies 100 Summary 105 Further reading 106 Questions for discussion 106 Crime 107 Objectives 107 The market system and crime prevention 116 Government policies 117 Summary 119 Further reading 120 Questions for discussion 120 Road Congestion 121 Objectives 122 The market system and road use 126 Government policies 130 Summary 137 Further reading 137 Questions for discussion 138 Climate Change 139 Objectives 140 The market system and the environment 148 Government policies 150 Summary 155 Further reading 156 Questions for discussion 156 Poverty and Welfare 157 Measurement issues 157 Objectives 167

3 Contents vii The market system and poverty 169 Government policies 172 Summary 177 Further reading 177 Questions for discussion The Market and the Government 179 The market and efficiency 179 The market and equity 183 The market and other objectives 183 Government policy 184 Government and efficiency 185 Government and equity 191 Government and other objectives 192 Quasi-markets 193 Conclusion 193 Summary 194 Further reading 194 Questions for discussion 195 References 197 Index 205

4 THE ECONOMICS OF SOCIAL PROBLEMS Introduction This book is the fourth edition of The Economics of Social Problems. Since the first edition there have been some changes among the editors Carol Propper joined Ray Robinson and Julian Le Grand for the third edition, Ray left the team after that edition, and Sarah Smith has joined Julian Le Grand and Carol Propper for this fourth edition. While we have taken the opportunity to produce a radical revision and updating of the book, the basic approach to the analysis of social problems remains the same. Indeed, this approach the systematic analysis of alternative methods of economic organisation within a set of substantive policy areas is of even more relevance now than when the book first appeared. Since then, proposals to increase the role of the market in health care, housing, education, as well as congestion and climate change discussed originally as possibilities suggested by academic inquiry have assumed a central position in the policy portfolio of many governments. As such, both the approach of the book and the topic areas to which it is applied are of considerable contemporary concern. The basic aim of the book is to introduce students to some key economic concepts and methods of analysis through the study of a range of contemporary social problems. It is our deliberate intention to move away from the more abstract theoretical approach that is a feature of many introductory economics textbooks and instead try to provide a book that emphasises learning-by-doing. This is done through the simultaneous development of the relevant theory and its application to particular social issues. The success of the earlier editions of the book has shown this approach to be both popular and effective. All the relevant concepts and theories are explained in the text, and so no prior training in economics is required. The book is well-suited to first-year economics undergraduates studying applied economics or public policy. Many of the suggestions for further reading take the analysis to a more technical level than that in this book and can be used to build on the arguments presented here. Our experience has also shown that the book is valuable to students who are studying social policy, sociology and politics, and who want to understand 1

5 2 The Economics of Social Problems the rationale behind much of the policy intervention in their field, which is often heavily influenced by economic analysis. More broadly, the book should be useful to anyone interested in public policy without economics training, who would like to discover the contribution that the discipline can make towards understanding some of the pressing social problems that confront us today. The problem areas We have called the issues discussed in this book social problems, to distinguish them from the more conventional economic problems (such as inflation, unemployment and economic growth) that are usually dealt with in books about introductory principles. This is not a distinction we would seriously defend all problems faced by a society, including economic ones, are presumably social problems by definition but we feel that this has support from popular usage. We would also like to draw a distinction between the social problems presented here and the subject matter of the traditional academic study of social policy. While many of the social problems we investigate form a core part of social policy courses (the chapters on health, education, housing, pensions, poverty and welfare), we also look at road congestion and climate change. These two issues are less often covered in social policy courses and yet are both pressing problems facing society today. Since the third edition, several chapters, including those on pensions and on climate change, are completely new; and all the remaining problem chapters have been extensively rewritten to reflect current issues, and to respond to developments in the economic analysis of those issues. What has not changed from earlier editions is the adoption of a common structure and analytical approach to all the areas studied. Since this is a crucial feature of the book, it needs to be explained in more detail. Structure and approach In the process of teaching the material on which this book is based, we have learnt a great deal about the difficulties that the study of social issues involves when used at the introductory level. In particular, we have found that students often lack a framework that would enable them to introduce some order into their inquiries about particular problems. For this reason, we believe it to be helpful to use a consistent approach for examining a range of problems. This is a key feature of this book: it is not a series of separate essays on individual topics or a discursive examination of some economic aspects of each of the problem areas, but an integrated and systematic framework for studying each problem in a consistent way. Broadly, each chapter contains three basic sections. First, we ask what society s objectives are in the area concerned. In most cases we decide that these objectives can be summarised conveniently under two main headings: the achievement of efficiency and of equity. Efficiency considerations refer to the provision of the quantities of housing, hospitals, schools, residential homes and

6 Introduction 3 so on that yield the greatest level of aggregate (net) benefit to the community. Equity issues are concerned with the justice or fairness of the way that these goods and services are divided between different members of society. However, while we concentrate on efficiency and equity, there will be other objectives that society will also wish to pursue. The promotion of consumer choice and the fostering of a sense of community or altruism, for example, are two others that figure in some of the areas in this book, and we discuss these where we consider it relevant to do so. Having so specified society s objectives, we can say that a social problem exists whenever the existing system fails to meet the objectives set for it. The next question to ask is whether the private market the dominant means of providing the goods and services that we use in our everyday lives will meet these objectives. In some of the areas we examine, the market is the main means used (housing, for example); but in others, the market has been either replaced or stringently regulated (education and health care, for example). Hence the second main section of each chapter considers the arguments for and against the use of the market system as a means of allocating and distributing the good or service in question. Then, in the light of certain shortcomings of the market, in the third section we examine the desirability or otherwise of government intervention. Although we consider numerous forms of public policy, ranging from minor adjustments in the market s operation to its complete replacement, we show that they all fall into one or more of three general categories: direct public provision, tax or subsidy policies, and regulation. But each of them is shown to be subject to the same tests of efficiency and equity that were relevant to the private market. Those familiar with earlier editions of the book will find that there is much greater discussion of the actual use of market solutions rather than discussion of potential market-based solutions and much more explicit consideration of government failures in the areas concerned. This reflects changes in economic thought. In recent years, there have been major developments in the economic analysis of government policy, showing how governments, as well as markets, may fail to achieve social objectives such as efficiency and equity. Although the theory of government failure is not yet as well developed as that of market failure, we have tried to give an exposition of the relevant arguments. In addition, there has been much greater reliance on market tools in areas such as education and health, where previously markets were not used. Throughout the book, we have emphasised that the task of the social or economic analyst is not to contrast one perfect system (market or non-market) with another, but rather to compare two or more imperfect ones to discover which is the least worst. The first and last chapters do not have this structure, since they are not concerned with specific problem areas; but they are none the less an integral part of the whole approach. Before students begin to study a particular problem, we feel it is important that they have at their disposal some general discussion of social objectives and their relationship to the operations of the market system. Chapter 1 is an attempt to provide this. Students will find it useful to look at this chapter before they consult the one dealing with the area in which they are

7 4 The Economics of Social Problems interested. The last chapter, Chapter 10, is an attempt to pull together the links between all the previous chapters. In the context of a general discussion about the merits and demerits of the market and of government policies, it draws attention to the common elements in the discussions of each problem area, and to their wider implications. Again, it differs from the final chapter in earlier editions in that it now incorporates a far more developed theory of government failure: one that, so far as we are aware, has no direct equivalent in other economics texts. We believe that this format has two advantages. First, it has the unity of approach that, as we emphasised above, is essential for the student to obtain a good understanding of the generality of economic analysis, and indeed of the specific problems themselves. Second, it does, in fact, enable us to cover most of what economic analysis has contributed to these subjects. Much of the debate between economists has been about market versus non-market systems of allocation. But the contributions to this debate are dispersed among countless books and journals. By bringing together the disparate strands of this debate into an integrated study at the introductory level, in the context of social issues of wide concern, we hope to make accessible to the maximum number of readers a systematic critique of market and non-market economic systems.

8 THE ECONOMICS OF SOCIAL PROBLEMS Index Adverse selection 33 4, 55, 170,182 Advice 79, 84 5, 180, 193 Ageing population Altruism 14, 23, 37, 184 see also Motivation, extrinsic Annuity 74 5, 80 Asset-based welfare Asymmetric information 35, 96 7, 186 Athens congestion scheme Australia 58, 61, 63, 82, 91, 101, 103, 159 Barker Review of Housing Supply , 104 Becker, Gary 107, , Behavioural economics 79, 181 Benefit external benefit, see Externalities net benefit 7, 9 10, 21 2, 126 marginal benefit 7 8, 21 2, 71 2, 42, 129, 142, 149 marginal social benefit 7 10, 21 2, ; and health 29 30; and education 42 3; and police , 115; and road travel production benefit 50 social benefit 7, 36, 50 1, 116, 189, 190 Beveridge, Sir William 81, 91, 167, 172 Canada 159, 161 Capabilities Capital capital market imperfections 54 human 49 50, 52 3, 63, 158, 168, 171 Categorical benefits 172, Child Trust Fund 173 China 15, 147, 148 Choice 6, 32, and education 54 6, and housing 102, and health care 32, 46 and pensions 84 6 and poverty 158, 161 Climate change Climate policy ramp 143 Coase, Ronald 148 9, 150 Command and control Community 14, 23, 105, 183 4, 192 Competition 22, 187, 193 and education 59, 64 and health 34, 41, 45 6 Compulsion 51, 58 9, 85 6 Congestion Consumption-smoothing 70 5 Contingent valuation 124, 144 Cost costs of crime external cost see Externalities marginal abatement cost marginal cost 8 10, 22, 42, 127, 132 3, 142, 148 9, 153, 187 marginal damage cost 141 3, marginal social cost 8 10, , 182, 187; and health 29; and police 108 9; and road travel , 134 opportunity cost 6, 52, 53, 123, 145 social cost 36, social cost of carbon 143 Cost benefit analysis 112, 140, 142,

9 206 Index Cream-skimming 41 Crime Cuba 15 Demand consumer 16 17, derived 122 elasticity 131 excess 17, 20, 42 3, 188, Denmark 49, 61, 92 Dependency culture 175 Deprivation indices Diminishing marginal benefit 71 2, 144, 169 Diminishing returns see Rates of return Discounting 72 3, 110, Discrimination 97, 172 Distribution of income/wealth see Income, Wealth Earned Income Tax Credit (EITC) 175 Economies of scale 76, 159, Education Educational Maintenance Allowance (EMA) 62 Efficiency and climate change and congestion 122 and crime and education 50 1 and health care and housing 91 and pensions 70 5 and welfare 167 Elasticity see Demand, Supply Emissions trading Endogeneity 111 Equality 12 13, 31, 44 of access 31, 37, 44, 55, 58, 62, 64 of opportunity 52, 55, 168 9, 183 of outcomes 169, 183 see also inequality Equilibrium (market) 17 20, 97 8, 129 Equity 11 14, 31, 183 and climate change and congestion and crime and education 51, 57 8 and health care 31 and housing 90 1 horizontal 125 and pensions 75 7 vertical 125 Equivalence scales 159 Executive pay 174 Externalities 16, and congestion and education 56 7 and health 35 6 and housing 91, 92 6 and pollution and poverty 167 Finland 40, 61, 161 France 70, 99 Freedom see Liberty Free-rider problems 116, 149 Frey, Bruno 38 Funded pensions 83 4 Germany 46, 70, 81 5, 91 2, 99, 101, 104, 161, 192 Gini coefficient Government provision 23 4 and crime and climate change 150 and congestion and education and health care 40 2, 45 and housing and pensions 82 4 and welfare Graduate tax 64 Grandfathering 155 Greece 70 Health care Health maintenance organisations (HMOs) 46 Higher education 61 5 Housing House prices 60, 90, Housing benefit 89 90, 97, Income distribution 12, 105, 126, measurement median 75, 160 mobility 165 7

10 Index 207 India Inequality Inflation 76, 80, 84, 170 Information asymmetric, see Asymmetris information imperfect 34 5, 54 6, 78 9, 96, 180, 182, 189, 191, 193 Insurance and crime 103, 113, 115 and health 32 4, 37, 40, 42, 45 6 insurance failure and pensions 75, 80, 78, 83 social insurance 83 4, 167, Intergenerational distribution 140, 145 Intergenerational mobility Investment 50 4 Ireland 69, 92, 103, 161 Italy 40, 42, 53, 70, 161 Korea 15, 61 Kyoto protocol 147, 152, 155 Landes, William Le Grand, Julian 38 League tables 60 Liberty 14, 23, 107, , 162 8, 183 4, 192 London Congestion Charge 121, 132, Lorenz curves Market system 15 23, and climate change 148 and congestion 126 and crime and education 52 4, 64 5 and health care 32 3 and housing 91 and pensions 77 and welfare 169 Means-testing 44, 77, 82 3, 101 3, 174 5, Median voter 189 Minimum standards 12 13, 183 and education 51 and health 31, 37, 44 and living standards 167 8, 172 and pensions 90 Minimum wage Monopoly 35, 40 1, 58, 99, 182, 184, 186 7, 189, 191 Monopsony 40 Moral hazard 33 4, 44, 46, 83, 170 1, 182 Motivation extrinsic 37 8 intrinsic 38 knights and knaves 37 8, Moving to Opportunity (MTO) 93 4 Murray, Charles 175 National Health Service 39 45, 187, 193 National Pension Savings Scheme 85, 87 Neighbourhood 92 4, 102 3, 105, 111, 113, 115, 162 Netherlands 46, 91 2, 104, 161 New Zealand 40, 58 9, 61 Nordhaus, William 146 Norway 40, 61, 92 Okun s leaky bucket 145 Owner-occupation 92, 95 6, 98 9 Pay as You Go (PAYG) 83 4 Pensions Pensions Commission 70, 85 Pollution-haven hypothesis 148 Polluter-pays principle 147 8, 150 Posner, Richard Poverty absolute 75, 160 child 157, 162 measurement pensioner 75 7 relative 75, 160 trap 175 Prisoner s dilemma 94 6, 117 Property rights , 188 Public goods 117 Quasi-markets 45, 59 60, 185, 187, 193 Rationality 55, 71, 78, 84, 109, 175, Rationing 43 4, 64, 131, 133, 135, 188, 191 2

11 208 Index Rates of return diminishing returns 8, 71 2 market rates of return returns to crime 110 returns to education 52 4, 57, 61 2 returns to housing investment 94 6, 100 returns to saving 74, 84, 86, 146 Rebound effect 142 Regulation 23, 185, and climate change and congestion and health care and housing 101 and pay and pensions 84 6 Regulator capture 151, 191 Retirement 71, 77 Revealed preference 124 Right to Buy 91, 104 Risk social/aggregate 80, 84, 170 types 33 4, 55, 64, 96, 170 Second-best policy 131 Sen, Amartya 162 Signalling 57 Singapore 15 Singapore Electronic Road Pricing Scheme 136 Smith, Adam 21 2, 160 Social housing 91, 101, Social justice 168, Spain 92 Stern Review on the Economics of Climate Change , 144, Stigler, George Student grants 62 4 Student loans 62 4 Subsidies see Taxes Supply 16 17, 20 1 elasticity 97 9, 104 land Targets 42 Taxes and subsidies 23 carbon taxes fuel duty, vehicle excise duty graduate tax 64 housing subsidies in-work tax credits road pricing subsidised health care tax and benefit system tax relief on pensions 86 7 Titmuss, Richard 37 8 Townsend, Peter 162 Transition matrix Type I, Type II errors Uncertainty 33, 74, 78, 94, 100, 109, 125, 142 4, 146, Unemployment 6, 71, 77, 93, 110, 142, 167, 170 1, 173 United Nations 160, 163 USA and crime and climate change 147 and education 49, 58 61, 64 5 and foodstamps 90 and health care 27, 35 6, 39, 44 5 and housing 93, 99, and poverty and welfare Value of life 31, 112, 144 Value of time Voting Vouchers 59, 62, 93, 102, 103, 184, 194 Wealth distribution measurement role of assets 173 Welfare Working Families Tax Credit (WFTC) 175 7