Tuesday, October 13, 2009

Cost Benefit Analysis

Interesting "greatest good for the greatest number" problem, in the Philippines.

Several feet of rain. Dams about to burst. Authorities have to release very substantial amounts of water, even though it means villages downstream will likely be washed away. Because if they DON'T release the water, the dams will break and even more people will be lost.

"The release of water from the San Roque Dam flooded the Agno River, flooding at least 30 towns and dozens of villages downstream...'There was really heavy rain, so water had to be released from the dam, otherwise it would have been more dangerous,’ Nathaniel Cruz, the government’s chief forecaster, told The Associated Press." (article)

This happened in NC during Hurricane Floyd, in 1999. Authorities were blamed for "killing" people, but in fact the release of water almost certainly saved lives and reduced the total damage. You lose the dams, the floods are MUCH bigger, and then you have to rebuild the dams.

The problem is that the same thing is true about opportunity costs of a monetary nature. Dams are physical, but so are school buidlings and teaching resources. If we decide we are going to save everyone, with programs such as an unlimited focus on special needs children, or people with handicaps, then another generation of children are going to get swept away when the dams burst.

You can't save everyone. As I always tell my students, an economist is someone who believes, sincerely believes as a matter of moral justice, that the infant mortality rate should be positive.


Something clever here said...

Hi Mike, have you seen the experiments in morality that were publicized about a year ago? They gave people various scenarios, eg: There's a runaway train, and five people tied to the tracks. You're on a bridge with a fat guy, and if you push him in front of the train you'll derail it and save five people. What should you do?

Most people wouldn't push the guy. They couldn't explain why, they just felt it'd be wrong. Researchers said generally people put a lot more weight on the outcomes they actively caused, and discounted what happened when they took no action. They thought it was hardwired into people's brains, an evolutionary leftover from our days in small tribes.

Michael Ward said...

Something similar comes up when I have taught the abilities bias in human capital accumulation. That is, the return to more schooling is higher for students with higher raw abilities. A conclusion is the optimal amount of schooling differs across individuals or, ... we should not impose the same educational attainment standards on all students or, ... "Some Children Should be Left Behind."

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