Friday, September 21, 2007

WAFF

For those of you unfamiliar with the lingo: WAFF = Warm And Fuzzy Feeling.

So, I struggling to stay awake about 80 minutes through an economics of health class (it's hard to doze when you're the only student in the class) when the professor mentioned something about a 'caring externality'.

The idea is that utility functions are interdependent, and that I derive satisfaction from seeing other people not dying on the streets, or more formally, from seeing them consume health services.

I am sorely torn on whether this is a legitimate externality. From basics: an externality is when the marginal social benefit does not equal the marginal private benefit, or vice versa for costs. In this case, it does seem equality does not hold, because someone I know who consumes health care also confers benefits on me, because I prefer seeing them healthy than ill.

BUT! Doesn't this argument extend to everything? Food? Video games? Should the government subsidize Halo 3 because then I'll be able to play with more people, and more people I know will be able to enjoy the game, which subsequently makes me happier?

This clearly is leading us into a minefield. If we accept the 'caring externality' for health care, we accept that every good has such a positive externality attached. I have not legitimately heard this suggested by anyone, and nor would I take seriously anyone who suggested it.

Thus, I reject the concept of the 'caring externality' until I can think of a more cognet argument in its defense.

POSTSCRIPT: I do not plan on purchasing Halo 3.

1 comment:

Matt Nolan said...

An externality exists as long as the consumption or production of a product changes the payoff for some third party who is not involved in the consumption or production of the good.

Now the above externality relies on the value judgment that people gain satisfaction from other people getting to go to hospital etc. Ultimately, it depends on what we think people value, it is a normative rather than a positive statement, and as a result depends on what the analyst thinks.

This type of caring externality will exist in any product that we assume people are altruistic about.

The Halo game argument is a little different. With Halo, ownership of the game increases in value as more people buy it, so that peoples decisions are strategic complements. In this case, someone else choice to buy the game increases your incentive to buy the game as well, so their is the possibility of multiple equilibrium which can be pareto ranked.

Awesome blog btw, love the blogs name!