A Pareto-Optimal Move
By David Henderson
Economists often talk about Pareto-optimal moves, that is, changes in policy that make some people better off without making anyone else worse off. But we have trouble coming up with any real examples. It’s an easy exercise to show that eliminating restrictions on sugar imports into the United States would create greater dollar gains to U.S. consumers and foreign producers than the losses to the domestic producers and the few favored foreign producers who would lose the scarcity value of their quotas. But it’s not a Pareto-optimal move.
An editorial, “Senior Liberation Act,” in today’s Wall Street Journal, though, discusses such a move or, more correctly, as close to such a move as we’re ever likely to see. In 1993, the Clinton administration, without any change in legislation or even the standard change in regulations, started to disallow people who receive Social Security and who are 65 years old or older from leaving Medicare. Some seniors want out of Medicare. Letting them out would be Pareto-optimal. If the government forces them to stay in or lose Social Security benefits, the vast majority of the small percent who would have fled Medicare would stay in and the government would spend money on them. But letting them out would reduce the government’s spending on Medicare with an increase in Social Security spending only for that tiny sliver of the population that wanted out of Medicare so badly that they were willing to forgo their Social Security benefits. The Journal writes:
If even 1% of Medicare-eligible retirees voluntarily opted out, Medicare expenditures would decrease by about $1.5 billion a year, and by some $3.5 billion a year by 2017.
Changing this government policy, which some Medicare recipients are suing to do, is not literally Pareto-optimal. If a substantial number of Medicare beneficiaries leave, then a small number of federal government employees might lose their jobs administering the program and would go to their next-best job, thus losing some producer surplus. But it’s close to Pareto-optimal.