My Ph.D. students’ responses to the following question on their final exam disappointed me:

the modern U.S., what is the most efficient
way for the federal government to spend an extra billion dollars?  What is the maximally utilitarian way for the federal government to spend this sum?  (In both cases, assume that tax cuts are not
an option).  Use everything you’ve learned
to craft a thoughtful answer, and be specific.

Most responses fell into one of the following undesirable categories:

1. Cop-out answers: “There’s no such thing as efficiency or utility.”  “It’s impossible to know what’s efficient.”  “It’s impossible to know how happy someone is.”

2. Definitional answers: “Whatever maximizes the social value of resources.”  “Whatever makes people as happy as possible.”

3. Hasty equivalence answers: “[Six sentences on the most efficient policy.]  The maximally utilitarian policy is the same.  The end.”

4. Imaginary answers: “The maximally utilitarian policy is to give all the money to a utility monster.”

5. Satisficing answers: “The most efficient policy is to clean up air pollution.”  Why is this the most pressing negative externality on earth to fix?  No explanation.

Note: None of the weak responses, with the possible exception of the Definitional Answers, seems inspired by GMU students’ libertarian politics.  I suspect many Princeton Ph.D. students would have given similarly weak answers.

My challenge: Can you do better?  The best answers will be highlighted in a follow-up post.  Note that “efficiency” refers to Kaldor-Hicks efficiency, a.k.a cost-benefit efficiency.