Ben Friedman reviews Nudge

Ben Friedman reviews Nudge by Richard Thaler and Cass Sunstein on the New York Times. Pointer by Greg Mankiw

Becker and Posner on Obesity and Externalities

Becker and Posner discuss in a recent post if it is justified for intervene in the fast food industries by introducing bans on trans fats or by requiring fast food chains to post on menus the calorie content of the food they serve as New York City as recently done.

I found particularly stimulating Becker’s critical take on whether it is appropriate to view obesity as imposing an externality on others. Here’s an excerpt from Becker’s post:

The so-called externality results from the fact that greater obesity raises taxes on others because the medical bills of the obese are partly paid by general taxpayers due to subsidized medical care. As Posner points out, this argument may be weak because obese adults die earlier than others and in this way obesity saves medical costs. However, even if true, I am uneasy about such externality arguments. Typical true externalities occur when actions by one individual or firm directly harm others, as when pollution by a company worsens the health of inhabitants, or when a drunk driver crashes into another car and injuries or kills the driver and passengers of that car.

But the alleged “externality” with regard to obesity is due only to the government’s subsidy of medical expenditures, so that it is a case of one government intervention- justified or not- causing another intervention-control of eating. It is not a path of intervention causation that most people would be comfortable with in many situations. For example, since the government subsidizes the medical care of children of poorer parents, a mechanical application of this type of externality argument would say that this justifies governmental control over the number of children that poor parents can have. Additional children of these families create an “externality” by raising taxes on others to pay for the medical costs of these children. Many similar examples can be given where government regulations and other government programs cause certain types of behavior that raise taxes or subsidies and adversely affect taxpayers, even though there would be no externality from this behavior in the absence of the government programs.

An Austrian View on Nudge

Gary Galles on the Ludvig von Mises Institute site takes an Austrian, critical view at Thaler’s and Sunstein’s argument, presented in their book Nudge, that governments can increase economic welfare by paying greater attention to choice architecture. Choice architecture can help alter people’s behavior in a predictable, desirable way without restricting the options available or significantly changing economic incentives. Galles writes:

“While those interested in liberty should read those and other careful considerations of the theory behind Nudge, there is another fatal but overlooked flaw in the book’s argument. They begin by assuming that people’s current choices reflect the results when they are left alone to make them (i.e., reflecting self-ownership and voluntary market choices). That is why any shortcomings must be the fault of irrational individuals, who need paternalistic nudges to improve things. However, our current savings, organ-donation, and health choices are not those of free individuals; they are the choices made in large part because current government policies — taxes, regulations, mandates, etc. — impair incentives. They are government failures presented as market failures.”

Read Galles’ article

Of behavioral economics, The New Yorker, climate change and soft paternalism

In What Was I Thinking, the New Yorker reviews two books on behavioral economics: “Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Dan Ariely and “Nudge: Improving Decisions About Health, Wealth, and Happiness” by Richard H. Thaler and Cass R. Sunstein.

The New York Times also discusses Nudge and the idea of soft paternalism the book supports in A Nudge (or Is it a Shove?) To the Unwise: “For the case against nudges, see “Paternalism and Psychology,” (PDF) an essay by the Harvard economist Edward Glaeser. For the case in favor, see “Nudge” or this essay by Mr. Sunstein and Dr. Thaler.”

Another article in the New York Times, Are We Ready to Track Carbon Footprints?, discusses Nudge in relation to climate change. Here is an extract:

The authors of “Nudge,” Cass Sunstein and Richard Thaler of the University of Chicago, agree with economists who’d like to reduce greenhouse gas emissions by imposing carbon taxes or a cap-and-trade system, but they think people need extra guidance. Getting the prices right will not create the right behavior if people do not associate their behavior with the relevant costs,” says Dr. Thaler, a professor of behavioral science and economics. “When I turn the thermostat down on my A-C, I only vaguely know how much that costs me. If the thermostat were programmed to tell you immediately how much you are spending, the effect would be much more powerful. It would be still more powerful, he and Mr. Sunstein suggest, if you knew how your energy consumption compared with the social norm.” read more

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