Lynne Kiesling

Glen Whitman’s got a nice post discussing utilitarianism, Coase, Layard, and the implications of Will Wilkinson’s recent evisceration of Layard’s utilitarian interventionist arguments about status and well being. When I first read Will’s post, my initial reaction was “yikes, I hope I never get on Will’s wrong side!” Will cleverly applies Coasian analysis to conclude that if you want to retain a utilitarian, consequentialist approach to status inequality, the least-cost avoider principle from Coase’s “Nature of Social Cost” implies that in some cases the least-cost alternative may be for you to change your preferences. In other words, if you are envious, get over it. Glen writes:

This reasoning opens a mighty interesting can of worms (and I mean that in a good way). In the traditional Coasean approach, preferences of agents are taken as given, and the only question is whose actions can reduce harm at lowest cost (keeping in mind that all harm is relative to the parties’ preferences). But if actions can change preferences, it follows that changing preferences may in some instances be the least-cost means of reducing harm. This is true even for less exotic forms of externality than Layard’s status-externality. Take the airport noise externality. Maybe the least costly solution is for people to start enjoying the sight and sound of airplanes. Or consider the visual externality created by a factory that obscures the view of a nearby mountain. Perhaps the least costly solution is for people to stop caring so much about natural scenery and learn, Rand-like, to appreciate the man-made beauty of mortar, block, and glass decorated with thousands of electric lights.

This is an intriguing line of thought, and one that is going to be a challenge for mainstream economic theory to address. Our models routinely assume preferences are fixed and given, not malleable. It’s a simplifying assumption to enable the math to go through (you need the stationarity, coupled with some other mathematical assumptions, to prove existence of equilibria). But if you relax that assumption, how does it change your results? Clearly you can’t do the same mathematical analysis, so it’s hard to compare results. It’s even hard to show that changing your preferences is the least-cost alternative in a given situation, except as an ex post revealed preference inference.

So while I think Will is right, and Glen is too, I struggle to see how we can make this idea analytically useful.

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  1. While I can’t see how this approach could be made “analytically useful” either, I can suggest a couple of issues which might make interesting “test beds” for the approach, if anyone is interested.
    1.- Location of oil and natural gas drilling rigs and production platforms offshore along the east and west coasts and the west coast of Florida.
    2.- Location of wind turbines offshore, starting (for example only, of course) with Hyannis, Martha’s Vineyard and Nantucket.
    Both of these examples may be flawed, since the presence of the structures involved would obscure only the horizon; and, then, only to a very minor degree. Acceptance of this very limited visual impairment of the horizon would likely be far less costly than inventing and implementing invisible drilling rigs, production platforms and wind turbines.

  2. Analytically, the equilibrium stuff is do-able, if you have a solid way to model how preferences change. And coming up with such a model would necessarily mean tackling the big hole in the arguments you’ve linked.

    Why are we assuming that changing preferences is easy or cheap? I think there’s plenty of evidence that preferences do change, and that some preference change can be willed. But easy/cheap/no big deal? That’s harder to buy.

    I agree with your point that it’s hard to prove with formal methods that changing your preferences is the best solution — but even *without* the formal analysis, I think that the argument they’re making (and that you like) rests on this assumption.

  3. Yes, precisely! In essence you assume a function that represents the dynamics of the preference change. I’m skeptical about our ability to do so in a meaningful way.

    I wouldn’t argue that changing preferences is easy or cheap, but would instead argue that considering the ease/cheapness of changing preferences when deciding on, say, a legal rule that assigns rights/liabilities a la Coase adds a dimension to the space and to the possible outcomes.

    Another analytical difficulty: how does one assess whether or not preference changes are easy or cheap?

  4. Adaptive preferences and utilitarianism

    In his on-going and wholly justified assault on Richard Layard’s book, Happiness, Will Wilkinson raises a fascinating idea. The best way of dealing with externalities, he says, might be not to tax them away, but to encourage sufferers to

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