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I am a welfare economist, working on fairness in economics, and I would like your opinion on some distributional dilemma.

Suppose we have the following situation:

A country is endowed with some resources. For instance, the government conceded the exploitation of a waterfall to an electricity company and receives in exchange a certain share of the water and electricity monthly production of the firm. The government decides to distribute these resources (monthly electricity and water) directly to the population.

Let’s make the following assumptions:

  • The individuals in the population do not differ in needs. It is not the case that some are badly hill and others in good shape. Also this water and this electricity are “extra” resources: a decent consumption of water and electricity is already guaranteed independently of the availability of these additional resources.
  • Individuals do not have legitimate claims over some of the resources. The waterfall lies in a remote unpopulated part of the country that was owned by no-one, and no-one is negatively affected by the production.
  • However, people differ in preferences: some like to have more water, some like to have more electricity. So the government might decide not to give the same share to everyone. It might decide to give a larger share of water to those who prefer larger quantity of water over electricity and vice-versa.

Now suppose that the citizens do not only have preferences over what they receive, but also compare the share they receive with what others receive: they have other-regarding preferences. It might be the case, for instance, that

  • Jane prefers electricity over water. SHe receive a package with relatively more water, say 2% of the monthly production of water and 1% of the monthly production of electricity
  • Kate prefers water over electricity and receives the opposite package: 2% of the electricity production and 1% of the water production.
  • Although Jane prefers her package to Kate’s, Jane is hurt by the fact that Kate receives more electricity than her.
  • So Jane would prefer that Kate receive less electricity, even if her dotation was the same, only because she would suffer less if Kate did not had more electricity than her. In that sense, she has other-regarding preferences, preferences that do not depend only on what she gets, but also on what other get.

My questions are the following :

  1. Should the fact that people have other-regarding preferences influence in any way the way the government will distribute the resources? On which normative grounds?

  2. If the government decided to take other-regarding preferences into account, what kind of objectives should it pursue? So far I have envisaged two possibilities:

    • The government could want to equalize some notion of well-being taking other-regarding into account. For instance, someone who is hurt by receiving less of a resource than another could be compensated by receiving more resources than one who does not care about what others receive.
    • The government could want to minimize destructive social sentiments such as jealousy. For instance, if two way of allocating the resources are deemed equivalent, but one features “more” jealousy than another, the government might want to implement the one with less jealousy.
  • An interesting question. What do you mean by other-regarding? Is there any overlap with behavioural economics here (not that I know what that is in substance)? – Mozibur Ullah May 11 '13 at 0:41
  • @ Mozibur Ullah : yes, this is linked to what is usually called "behavioral economics", a category which is not very precisely defined anyways so do not be ashamed not to know what it is in substance;). In general, other-regarding preferences are preferences that depend not only on what you get, but also on what others get. I try to give an example of such preferences in the post, but I will make it more precise, as your comment made me realize that it was not. – Martin Van der Linden May 11 '13 at 0:49
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1) "Should" is fairly normative and depends on our optimization parameter. If the goal is to optimize in aggregate output, all allocations are equivalent. If the goal is to maximum utility, then the comprehensive preferences of the entire population must be considered. As all allocations are equivalent for purposes of aggregate output, but are not equivalent for maximized utility, I imagine that it would be fairly reasonable to allow comprehensive utility to affect distribution.

However, there are other alternatives. For example, nothing in assumptions prevents the imposition of privacy mandates, which would remove other-regarding preferences from consideration and allow direct optimization in self-only optimization, which reduces to fairly simple economic models.

2) For the implementation agency, privacy would most likely be optimal. There comes as little surprise, after all, it is against cultural norms within the U.S. workforce to discuss salary for this exact reason. However, it would perhaps not be unreasonable to implement other solutions, such as the following model:

Common Resources - holding prior to distribution. All resources from the usage public capital are accumulated here prior to distribution, as well as returned in accordance with fees.

Distribution System - any time there are any common resources, all are immediately distributed perfectly equally to all citizens.

Conversion Market - citizens may trade one resource for another. To prevent loss from exploitation, a standard market rate should be implemented. To prevent loss from difficulty in trading, there should be no transaction fees.

Removal Service - Citizens may request the removal of resources from other citizens allocations.

Protection Service - Citizens may pay into the common resources to have their resources protected from removal.

Removal/Protection example:

Citizen1 bids x to remove y resources from Citizen2. Citizen2 bids z for protection.

x + z resources become common and then if x > z, y of Citizen2's resources become common.

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Governments have severe problems when it comes to "distributing" resources.

Governments get resources by taking them from people without their consent. If you disagree with how they use resources and decline to provide them with resources they demand then you will be punished. If you don't give up this "resource" that the government wants to "distribute" then you get fined, or go to jail, or get executed. This is not a good way to deal with the production and supply of goods. If people have some objection to what the government is doing they have no means to stop the government from doing it, except, possibly, an election every few years if you are in a relatively free country. If you are in a less free country, you can either shut up or end up in a jail cell if you're lucky. If you're not lucky, you get tortured to death. So the government has very little feedback on whether it is acting properly and is in a poor position to do a good job even if they want to. Governments everywhere should have less power to "distribute" stuff. You should not be encouraging such bad ideas.

You might say something like this. "Suppose we are dealing with one of the more free countries. Can't the government ask people nicely what they want?" Sure, they can ask, but the answers don't mean much. For any given good there are usually many technologically possible ways to make it that use different resources, some of which haven't been discovered yet and where most people don't understand most of the processes involved. How can people be expected to decide between different options they don't understand? The answer is that they shouldn't decide between different production processes. They should just decide whether they want to give up the resources the producers are asking them for and pay up if they want to and not otherwise. And usually the producers don't ask for the resources to produce stuff directly. Rather they ask for the money to buy stuff so that they don't have to deal with the problem of double coincidence of wants.

You talk about the government dealing with issues like jealousy. The only way to solve such a problem is by critical discussion and the government is not suited to doing that.

For a better understanding of the issues involved see Atlas Shrugged by Ayn Rand, Economics in One Lesson by Henry Hazlitt and Interventionism: An Economic Analysis by Ludwig von Mises.

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1) Not justly or scientifically. These 'other-regarding preferences' are purely subjective, based on whim, mood and million other human factors that are impossible to quantify.

2) There is nothing any government can successfully do in this regard, because these 'other-regarding preferences' are completely volatile and utterly unpredictable. Such is human nature.

  • Mikey : Thanks for you answer. Regarding 1) and 2), would you say it is also the case of "self-centred" preferences ( 1) that they are purely subjective, based on whim etc... and 2) that a government should not try to do anything about it because they are unpredictable). By self-centred preferences I mean those preferences one has over her own package of consumption for instance. Should a government not take these preferences into account either when distributing the resources? – Martin Van der Linden May 11 '13 at 0:44
  • @MartinVanderLinden - IMO, That's what 'other regarding' essentially boils down to: "Self-centred" preferences. A government must be just-even handed-'blind'. But as soon as a gov't involves itself in such subjective and volatile areas, this becomes impossible. – Vector May 11 '13 at 3:09

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