The purpose of this question is to increase the awareness of the distinction between statements which are not verifiable and those that, in principle, at least, are. It is not possible to verify a statement based on a normative proposition. However, a positive proposition which identifies a causal connection between some economic quantity (e.g. the total amount of consumption expenditure) and another (e.g. the national income) can often be tested by statistical analysis.
The correct answers to the five statements are:
N. The observation in the statement rests on a normative proposition which prescribes the behaviour of governments. It is true that the clause beginning ‘otherwise’ includes a positive statement, but it is conditional on the normative proposition.
P. This is a positive proposition. Governments are not asked to subscribe to any particular set of policies. The statement merely categorizes industrial policy as part of general economic policy.
P. This is a straightforward ‘cause and effect’ relationship between payment of a subsidy and its effect on price and output. A simple supply and demand analysis would demonstrate that the statement is logically correct given defined assumptions, and such propositions are considered testable by econometricians. Whether their tests are satisfactory is not our concern.
N. This statement prescribes how governments ought to act. Even if it were non-controversial, i.e. it is widely accepted as a correct course of action, the statement remains a normative one.
P. This is a tricky example. It is a positive statement which describes the normative position taken by voters. It does not prescribe intervention.
The student may ask the question does this mean that this course does not contain any normative statements which the student must accept? No: there is one. The choice of what the authors consider important to study involves the exclusion of topics that they either consider irrelevant or unimportant. There is no way of proving that their choice is ‘superior’ to any other choice.
Of course, there are plenty of normative statements in this book which are embodied in descriptions of actual government policy objectives or policy objectives which governments are recommended to accept. Students are not obliged to accept these, any more than the authors are, but they must know about them, if they wish to understand what governments are trying to do and how industry will react to government attempts to pursue their objectives. Students may find it useful to read and to comment on the following excerpt from an essay by an outstanding economist with wide experience of the study of government policies.
There is no objective scientific method of determining precisely the optimal size of the public sector. Much of the public debate is between conflicting interest groups disguising their motivations in rhetoric of one kind or another. An economic analysis cannot always indicate which side in the debate is talking most nonsense. Nevertheless, it can make a major contribution to clearer thinking about the role of the public sector both in general and in particular instances. More precisely, the function of the economist in the debate is to:
set out the logical structure of the argument;
identify at what points the answer depends on specific facts;
provide some guidance as to what the facts are, or, in some cases, why they may be well-nigh impossible to ascertain; and
identify where the argument depends on value-judgements and, if possible, give some guidance as to the importance of the value-judgements in determining the answer to particular questions.
It is this last feature of the argument which makes it impossible to arrive at totally objective, scientific answers to many of the questions raised in the area of public economics. For the value-judgements that are involved – which are chiefly those concerned with equality or with components of human welfare that cannot always be accurately captured in market transactions – affect every corner of the argument. Yet, by definition, they are not amenable to scientific verification and reasonable people may easily differ about them. But this does not mean that no answers can be found. Individuals make value-judgements all the time and societies are able to reach decisions based on them. One of the contributions of economic analysis is to bring them out into the open. But it is also to show that value-judgements are not enough and that the case for or against the incorporation of any activity within the public sector also depends on hard economic analysis and on certain facts that the economic analysis reveals as being crucial.
Source: Beckerman, W. (1989) ‘How Large a Public Sector?’ in D. Helm (ed.), The Economic Borders of the State, Clarendon Press: Oxford.
Identifying Gainers
Consider the pollution example. The output of the industry may be curtailed by the tax, but this also reduces the ‘output’ of pollution which to those who suffer from it means an increase in their welfare. If the pollution took the form of emissions of waste products into a river a reduction in the emissions might improve the stocks of fish so that fishermen would benefit.
A less obvious point is that a tax on pollution will increase central government revenue. Assuming a balanced government budget, the government can either reduce other taxes as an offset to the yield of the pollution tax so that some taxpayers will benefit, or it may increase government expenditure which will presumably confer benefits on at least some citizens.
Reducing Pollution by Fixed Quotas
Ignoring administrative problems, let us assume that the government has the following information about the supply curves of individual firms, denoting what they will offer for sale per period of time at different prices: at equilibrium price 4, total output is 640 units.
| Firm | Price per unit | |||
| 1 | 2 | 3 | 4 | |
| 1 | 100 | 170 | 220 | 250 |
| 2 | – | 100 | 170 | 220 |
| 3 | – | – | 100 | 170 |
| Total Output | 100 | 270 | 490 | 640 |
In the tax case, the tax per unit reduces the amount received per unit. If it were reduced to 3 currency units per unit of output, then total output would fall to 490 units (as shown in Table A1.1). As an alternative, let us assume that the government will only allow 490 units to be produced, and allocates each firm a quota based on the amount it would have produced if the price were ‘3’. However, the government is not concurrently fixing the price, and if only 490 units are produced, quantity demanded is greater than quantity supplied and the price will rise. Firms cannot respond by increasing output, because of the quota system. Firms have an incentive to exhaust their quotas, if they are maximizing profits, but supply is totally inelastic at 490 units. This is depicted in Figure A1.1.
Figure A1.1 The operation of a quota
The crucial difference between the regulation by licence and the tax case is that, in the former situation, the reduction of sales is compensated by the increase in price resulting from the official restriction of supply. The direction of losses is the same as before, except that no one benefits from any increase in tax revenue (see answer
This example foreshadows some important difficulties in implementing government policies. Such policies clearly require the gathering of information on market conditions and prospects. What incentive does the government have to obtain such information (which means incurring costs and spending taxpayers' money) and what incentive will firms have to supply it? These and similar problems are tackled in later modules.
The problem for lobbying groups is that if they were to be successful in persuading the government to adopt their policies, the benefits might not be confined to their members. If war pensions are increased, a war pensioner need not be a member of a war pensioners' lobby to benefit. He is a ‘free rider’ i.e. he obtains some benefits but does not share any of the costs of lobbying by having to subscribe to the lobby. If there is escape for one, there could be escape for all, and this would jeopardize the organization of the lobby. Therefore, inducements other than a common purpose have to be provided. Lobbies do attempt to have the benefits confined to their members by trying to persuade the government that membership of the lobby should be compulsory. The attempts by trades unions to operate a closed shop follow this line of action.
