The Economics of Social Problems

This chapter is intended to be primarily for those readers with a limited or non-existent background in formal economics, but it may also serve as a convenient synopsis for the reader with more extensive knowledge. Its purpose is to provide an analytical framework which can be applied in each of the subsequent chapters to the study of particular social problems. Accordingly, after a brief discussion of some terms and concepts, we begin by specifying society’s objectives in relation to economic activity. Over all it is argued that any society will have two main objectives. First, it will need to select the level of output for each good and service that leads to the highest attainable level of economic welfare. We have termed such an output the ‘socially efficient level of output’. Second, it will want to make sure that the socially efficient level of output is distributed between its members in a way that is considered socially just or equitable. Thus society’s dual objectives will be the achievement of efficiency and equity. Having considered these objectives we proceed to give an account of the way in which a private market economy, or market system, will organise economic activity and to examine the extent to which it can be expected to realise these objectives.

Good health is one of the most important contributors to individual welfare. It is an essential prerequisite to enjoyment of almost any other aspect of life. A high income or a good education will yield much less satisfaction to someone chronically sick than to his healthy friend. And, at the limit, poor health which leads to death will make all other sources of satisfaction irrelevant.

As long ago as 1890, Alfred Marshall, the leading English economist at that time, wrote that ‘there are few practical problems in which the economist has a more direct interest than those relating to the principles on which the expense of education of children should be divided between the State and the parents’.¹ Since Marshall’s time this problem has continued to exercise the minds of economists and others concerned with the financial arrangements by which resources are allocated to education — without any agreed answer being found. At the same time, the growth in the size and diversity of the education system (which now serves the needs of nursery school to university postgraduate students, and accounts for about 5 per cent of the total national income produced within the United Kingdom each year) has meant that the question ‘How should we allocate resources to education?’ has assumed even more pressing importance.

A recent White Paper stated one of their housing objectives as ‘a decent home for every family at a price within their means’ (Fair Deal For Housing [1971] p. 1). The extent to which the present situuation falls short of this aim can be appreciated by considering some of the following facts. In 1971 the Housing Condition Survey of England and Wales, conducted by the Department of the Environment, found that nearly 1,250,000 dwellings were unfit for habitation; this represents over 7 per cent of the housing stock of England and Wales. Moreover, among those dwellings classified as fit nearly 2,000,000 lacked one or more basic amenity. For example, over 1,000,000 lacked an inside lavatory and over 700,000 did not have a fixed bath. Altogether nearly 17 per cent of all dwellings (fit and unfit) lacked at least one basic amenity. So much for the ‘decency’ of many homes. On the question of ‘prices within their means’, the situation is equally dismal. In the 1960s various writers estimated that only between one-third and one-half of the population could afford to buy or even rent a new house (see, for example, Needleman [1965] ch. 8).

A regional problem exists when there are marked disparities in the standard of living enjoyed by people in different regions of a country. In the United Kingdom the most commonly identified manifestation of the regional problem is the level of unemployment in an area. For example, the depressed areas of Northern England, Scotland and Northern Ireland have consistently higher rates of unemployment than the more prosperous areas of the South and Midlands. However, a high level of unemployment is only one indication, albeit the most extreme, of a lack of demand for the commodities produced in a region, and hence a depressed labour market. Other features include the lower-than-average earnings received by workers in these areas and a lack of job opportunities for women. Both lead to a low level of economic prosperity. Apart from measures of household welfare associated with employment prospects, there are other aspects of regional depression which also affect the standard of living of people who live in these areas. For instance, in some regions the environment has suffered from the excesses of earlier periods of industrial expansion which have left them despoiled and polluted.

Great Britain is a predominantly urban society: nearly 80 per cent of the population live in urban areas. Problems that arise through living and working in areas of high population density are therefore familiar and of concern to most people. Among these problems’ those associated with travel often figure prominently: delays and frustrations of traffic jams, infrequent and unpredictable bus services, traffic noise, air pollution and accident risks are all common features of urban life. In this chapter we shall be concerned with one aspect of the problem: urban road congestion.

Pollution has been with us for a long time. In the fourteenth century, a royal document complained about the ‘abominable and most filthy stinks’ generated by the activities of London butchers in Seacoal Lane. In the sixteenth century, laws were passed prohibiting the use of coal fires in London, and in the 1850s sheets were hung over the House of Commons’ windows to try and reduce the smell of the Thames. Recently, however, concern over what is termed ‘the destruction of the environment’ has reached new peaks. This is partly because the volume of waste generated by our expanding society is itself expanding correspondingly, and partly because the satisfaction of more immediate needs by past economic growth has led to an increase in the demand for environment-oriented activities. To fish or swim in unpolluted rivers; to walk or climb in unspoilt areas of natural beauty; to look at clean buildings undamaged by air pollution; or simply to live in a clean, quiet environment: all these seem to have acquired a more important place in our society’s scale of values in recent decades. This increased concern has led to a corresponding expansion in interest in the economics of pollution.

In the preceding chapters we have seen that the aim of equity is often jeopardised by the existence of economic inequality. In this chapter and the next we shall examine the problem directly. By economic inequality we mean differences in individuals’ abilities to purchase goods and services, produced by the economy: what we shall term ‘differences in their purchasing power’.

In the previous chapter, we saw that the purchasing power of individuals in a market economy depended on the amount of resources owned, and the price received per unit of resources sold. Now government policies designed to affect the distribution of purchasing power can be conveniently divided into two groups: those which affect directly the incomes received from the sale of resources, and those which are aimed at reducing or increasing the quantity or quality of the resources owned. Into the first of these — which we shall call the ‘income’ category — fall such familiar redistributive tools as income taxes and social-security payments, which reduce and supplement respectively the income received by individuals from the sale of their resources in the market place. The second group — which we shall label the ‘resource’ category — includes taxes on wealth and nationalisation or state-appropriation policies, which affect individual holdings of (or claims on) capital and land. (This category should also include some government expenditures on education and on health care, since part of these are often explicitly redistributive measures, designed to improve the ‘labour resources’ of the poor by — in the case of education — giving them more marketable skills, or by — in the case of health — improving their ability to work.

In the first chapter we presented two objectives which society might have in allocating scarce resources between its members: those of efficiency and equity. In subsequent chapters we have discussed how market and non-market systems can be used to allocate resources in certain ‘problem’ areas, and whether their use can achieve an efficient and equitable allocation of resources in the area concerned. In these discussions, certain key issues have emerged repeatedly. Many of the difficulties involved in allocating resources within these areas have strong links with one another; indeed, many are simply aspects of the same conceptual problems. It is the purpose of this final chapter to try to isolate and to emphasise these links; and to draw out from the discussions some general lessons about different systems of resource allocation.