Is a paternalistic government beneficial for a society and its individuals?
By George Tucker
Postgraduate, Third Prize
Paternalism is the charge often levied at government policies that aim to promote
“good” or limit “bad” behaviours. A paternalistic government aims to increase the
welfare of a society and its individuals by changing their behaviour from what they
would otherwise do. We see this in practice all the time – a tax on cigarettes, for
example, is often justified not as a revenue raiser for the government but a way of
limiting harmful consumption.
This essay will address the issue of whether a paternalistic government can achieve
anything, and the problems it will face if it chooses to do so. I shall first present a
model of an individual. I shall then discuss how a paternalist might improve the
system, based on different social welfare characteristics. Next, I shall discuss the
problems the government might face and the limitations of this approach. Finally, I
shall conclude that in practice uncertainty justifies intervention in only the most
extreme cases.
Let us define paternalism as an external (to the decision maker in question) agent
influencing a decision in order to improve its outcome – i.e. increasing the agent’s
utility above that which they choose themselves. On the face of it, if we assume a
utility maximising agent, this seems impossible in the individual sense. However,
there are ways in which we can model an agent making a “wrong” decision. This
essay will focus on one such way, proposed first by (Strotz, 1955), which is modelling
the agent as having multiple “selves”. That is, this is a multiple time period model in
which the agent maximises his or her utility separately in each period. This essay will
present a (very) simplistic and perhaps obviously flawed example of such a model to
illustrate the point that people can by short-sighted. The reader is advised to keep in
mind an example such as smoking, which has short term benefits and long term
costs.
Let us assume one agent, i, who chooses consumption of one good A in periods one
and two separately (denoted by subscripts). There is an anticipated future cost for
consuming this good today – for example future health problems. The agent takes
into account their present value of this cost and future utility when choosing
consumption in period one. In period two, utility is reduced by consumption in
period one – earlier consumption is punished – but the agent may only choose
consumption in period two. Utility in each period is given by U1 and U2 respectively.
The utility function is quadratic to keep things simple and is formulated to ensure
that there is a natural maximum level of consumption. This negates the need for a
budget constraint.
So in period one:
Consumption in period one is increasing in a, the short term satisfaction of
consumption, and decreasing in d, long-sightedness; X, the future punishment and b,
an indicator of the natural level of saturation or diminishing marginal utility from
consumption.
In period two, setting the derivative of utility two with respect to consumption in
period two equal to zero:
Consumption in period two depends entirely on the present effects.
These give us a total self chosen utility of:
This is increasing in a, the short term gain from consumption and decreasing in b, the
short term limiting factor of consumption. It is initially decreasing in X – the future
punishment of consumption – but as X increase, the punishment becomes more
effective so the consumer lowers consumption to avoid the disutility. Short sighted
individuals (with small d) consume more, but this does not necessarily have a
positive effect on utility.
Now what would happen if a paternalist could maximise utility for the agent? A
paternalist would maximise both periods at once.
The consumer consumes less of the good in period one, by the value of X/2b.
The consumer consumes the same in period two.
This gives us a total utility of:
Which is greater than Us, the value depending on the value of the punishment, the
agent’s myopia and the short term satisfaction of the good. This is because in our
model the paternalist can anticipate the future effect of today’s behaviour better
than the agent can. The punishment matters more in the future than it does today,
so it affects the paternalist’s choice more than it affects the agent’s.
The model shows us that if people are short-sighted, they can be made better off by
an external force that takes into account their long term or lifetime utility. To answer
the question – assuming that if we can increase everyone’s utility (a Pareto
improvement) we can increase the utility of society – then yes, a paternalistic
government can theoretically benefit a society and its individuals. Now let us discuss
whether in reality it does.
The essential assumptions of this model are that people are short-sighted and that
some behaviours are utility increasing in the short run and utility decreasing in the
long run. To continue the example, smoking today is fun but smoking over a lifetime
may decrease lifetime utility. This assumption is the case in reality and we see lots of
examples, smoking and drug use being the obvious ones, but others might be saving
for retirement, committing a crime or even scratching an itch.
The model makes the crucial assumption that the paternalist knows what will
maximise the agent’s utility as well as the agent knows himself. This assumption of
course might not hold in reality. A doctor may well tell you that you should leave
your scab alone, but if it brings you great pleasure and only leaves a small scar is that
really a problem?
There is in reality never perfect information about the future. If the punishment X is
unknown, then the choice of consumption will depend on how risk averse or loving
the agent is. Moreover, the paternalist will need to take this into account when
setting the agent’s consumption. A risk loving person will maximise their utility by
consuming more than a risk neutral person and the paternalist will need this
information – which is not easy to get hold of. If the person smokes and does not get
health problems then their utility is not maximised by a paternalist stopping them
(provided they enjoy smoking).
The biggest problem with applying the model, however, is that in reality people of
course make their own choices. A paternalist can never stop someone doing
something outright, as they do not control them. This leaves us with two ways of
limiting consumption. The first would be to educate the agent about the long term
effects of consuming. We have seen, however, even with full knowledge of the
punishment the agent still consumes (too much). The problem is that people
discount future discomfort. This discounting lessens the eventual punishment. A
solution would be to use scaremongering to inflate the present value of X. The
paternalist could provide a scare factor, S, which cancelled out the discount factor.
This could be set so as to make the agent themselves choose the global maximum
utility (as previously set by the paternalist). In practice this could be done by
advertising, rumours or even advice from professionals. Of course this approach is
very difficult to get right, and in practice different people will perceive d and S
differently. Providing an aggregate level of S for all in a society will lower the
consumption of everyone who responds to it, but some people’s will fall by far too
much.
Another way to do it is to change the incentives of the product. Adding a tax limits
consumption by adding another cost. If you have to pay a tax of t for every unit you
consume, and you lose utility for doing so, you will consume less. Again, this relies on
the perception of the value of money. All who value money at all will cut
consumption, but those who value it most might cut consumption by a lot more. This
of course may reduce total welfare in a society as well as increase it. The outcome
depends on the heterogeneity of consumers in their response to the tax and the
positive short term utility gained from the product. Outlawing consumption falls in
the same category – it is essentially an extra cost for consumption.
So in practice it is very difficult for a paternalist to make an agent consume the ‘right’
amount of a good. This might mean that they should not try at all for most
behaviours, and in practice we do see interventions in only those goods which are
deemed to have significant long run effects – such as drugs and smoking.
To conclude, I have used a limited multiple self model to illustrate how future bad
effects of a good can cause inefficient consumption. This justifies action by a
paternalist. In practice however, uncertainty means that intervention can only be
justified in extreme cases. The model perhaps deserves expansion by adding in the
scare factor and taxes to see how they interact.
References
BBC, 2014. Smoking bans cut asthma and premature births by 10%, study says.
[Online]
Available
at:
http://www.bbc.co.uk/news/health-26770009
[Accessed 28 03 2014].
Caplin, A. & Schotter, A. (., 2008. The Foundations of Positive and Normative
Economics. Oxford: Oxford University Press.
Gravelle, H. & Rees, R., 2004. Microeconomics. 3 ed. s.l.:Pearson Education.
Strotz, R., 1955. Myopia and Inconsistency in Dynamic Utility Maximization. The
Review of Economic Studies, Volume 23, pp. 165-180.