Goods, Bads, Marginal Utility, and Happiness Research
By Bryan Caplan
When psychologists introduce economists to happiness research, they usually emphasize the finding that, once people enjoy a modest First World standard of living, additional income doesn’t make them much happier. What surprises me is that more economists haven’t responded “As we suspected. Ever heard of the Law of Diminishing Marginal Utility?” For goods, psychology and economics are already on the same page.
This is not true, however, for bads – stuff that people value negatively.
What does basic economics say about bads? Well, the corollary of the Law of Diminishing Marginal Utility for goods is the Law of Increasing Marginal Disutility for bads. The first unit of a bad is mildly annoying; the second unit is worse; and so on. Think about pollution: The worse the air, the more you’d pay to make it a little cleaner, right?
In contrast, a common (though not universal) finding in psychology is that people adapt to bads. If you get a high dose, you get used to it. Maybe it quits bothering you altogether. Obvious? Yes. Consistent with standard economics? Not really.
This might seem like a purely abstract issue, but it’s not. Lots of policies try to reduce the level of negative externalities. But if you take happiness research seriously, you at least have to wonder: Have people gotten used to this “negative externality”? If so, what’s the point of doing something about it?
Leading happiness researcher George Loewenstein famously wondered “how anybody could study happiness and not find himself leaning left politically.” I’d call this yet another counter-example for him. (And here’s another).