Economics by Topic: Decision Making and Cost-Benefit Analysis

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Links for Teachers: Brush-ups on this topic

    Benefit-Cost Analysis, by Paul R. Portney. Concise Encyclopedia of Economics. Overview with an emphasis on government decision-making. Brief article with 15 paragraphs.

    Hicks's compensation test. One-paragraph, clear discussion in bio of Sir John Hicks, Concise Encyclopedia of Economics


Ideas for Teachers
    Current events and ideas for potential classroom discussion:
      Cost-Benefit Analysis. Collection of lively, topical, provocative examples illustrating cost-benefit analyses in action for private and government decision-making. Includes links, comments, and discussions at the level of teachers, college students, graduate students, and post-graduates. From EconLog.

    Hidden Costs. The promoter of an idea typically plays up the benefits and plays down the costs. Economists delight in uncovering those hidden costs and often enjoy a moment of fun by taking the promoter by surprise.
      "What is Seen and What is Not Seen", Frédéric Bastiat (pronounced bas-tee-AH). Famous essay about what economists do, emphasizing their role in pointing out the unseen, unspoken costs behind great-sounding ideas. Excerpts can make for a provocative reading assignment. Examples include national security, the arts, taxes, infrastructure, international trade, jobs, credit, business, and private decisions. Originally written in French in 1848, it contains dozens of timeless, entertaining, readable examples. 301 paragraphs. Difficulty Level 0: High School
        Suggested Excerpt (8 paragraphs). Hidden costs and economists' goals defined, plus an example: Does breaking a window help the economy by creating jobs for glass-repairers?


Discussion questions:
  • Should a government's economic policy be set to
      1. Do no harm? What if short-term harm is rewarded by long-term benefits? What if harm to one person benefits thousands or even millions of others? What if no risks or experiments are ever undertaken lest anyone be hurt?
      2. Benefit the majority so long as it's a democracy? What if minorities are always outvoted? Are all decisions best made by voting?
      3. Benefit some? What if a particular region or group has an emergency? What if a new business finds itself up against an antiquated law? What are the pros and cons of lobbying? Should charity be offered by individuals or by the government?
  • Individuals, families, businesses, and the government make decisions every day. What are the similarities in all decision-making and why are they fundamental to what economics is about? How can weighing the costs and benefits help make decisions and what are the similarities and differences in decision-making for these groups
      Individuals (children, high school students, college students, working-age, graduate students, retirees, seniors, etc.)
      Families (adults' perspectives, children's perspectives, newlyweds, unmarried couples, seniors, etc.)
      Businesses (small-, individually-owned, family-owned, medium, large, corporate, etc.)
      Government (local, state, national, international; democratic, dictatorship; socialist, communist, federal, republican; religion-based; mixed forms, etc.)
  • Economics is particularly exciting when we can use what we know to poke holes in arguments presented in the press, made by our parents and friends over dinner, or in debating government policy proposals. How can focusing on the costs and benefits help sort out some debates?
      1. Why and when do the two sides of a debate not see each other's points of view?
      2. What aspects of debates are economists unable or able to address with cost-benefit analysis? Moral? religious? ethical? scientific? quantitative? mathematical? logical? empirical? family? business? government? international? monetary? non-monetary? long-run? short-run?


Related Topics
    Microeconomics, by Arnold C. Harberger. Concise Encyclopedia of Economics


Reading Excerpts:

    Difficulty Level 0: High School
    8 paragraphs from Frédéric Bastiat's "What is Seen and What is Not Seen":
    In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

    There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

    Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

    ...

    Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: "It's an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?"

    Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

    Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs' worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

    But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

    It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
    From Bastiat, Frédéric. Selected Essays on Political Economy. Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc., trans. Seymour Cain., ed. George B. de Huszar, 1995. Paragraphs 1-3, 6-10.
    Biography: Frédéric Bastiat.


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