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a blog from young economists at Nova SBE

How far do we see into the Future?

Regarding economic analysis, we are, more often than not, very dependent in our agents’ utility functions. They are at the core of all economic decisions put forth by all agents when either deciding what goods to acquire or how much to save for tomorrow. Alas, utility functions come not without hurdles, the main one being its actual estimation. Not only for the economist but also for the agent.

For the economist, the struggle is obvious. He has the titanic job of translating agents’ wants and desires into solid functions that can predict his actions according to different economic settings. While for the agent, it can prove hard to rank preferences in a consistence manner across time and space.

One particular nuisance regarding utility functions and respective decision patterns is their inherent myopia. Throughout the world, different people have one thing in common: They value today more than they value tomorrow and they don’t even thing about 10 years from now. There is evidence of everywhere. To take two extreme examples:

  • In the United States of America, we’re witnessing a rampant increase in the number of people afflicted by diabetes and obesity. As portrayed in the 2014 FED UP Documentary, most supermarket goods have added sugar and most teens are consuming enormous amounts of fast food, soft drinks, candies and snacks. This has led and will continually to lead to an increase in complicated health conditions that are easily foreseeable. They just weight more their consumption today than their health in the future in what concerns utility.
  • In developing countries, it is not uncommon to witness what some consumption patterns that seem ludicrous – People in areas afflicted with worms that severely hinder nutrition refuse to accept and take simple and free deworming pills that would reduce the incidence of other illnesses. More generally, people don’t use simple preventive methods and end up spending enormous amounts of money in treatment (for preventable diseases).

These two examples show exactly the same thing: today’s decisions don’t put a big weight on future welfare, even when the consequences of our actions are predictable and foreseeable. This lack of efficiency of the agents’ decision making processes can be perceived and treated as an externality that has to be accounted for.

Take as an example, smoking. Smoking is most detrimental to the smoker himself, it leads to a number of conditions and diseases that eventually cause death. Seen this way, smoking is a personal decision – people know the risks and the outcomes. However, going a little deeper shows that smoking has a lot of negative externalities. First, the health consequences of smoking lead to huge health care expenses partly paid by public funds and second, it has been shown that young teens are more likely to start smoking if their parents are smokers which virtually perpetuates the smoking habit within society.

As a result, there has been an increase in the number of anti-smoking policies trough out the world, the most extreme case being Australia where packs have been standardized for all brands and show graphic pictures of people suffering due to conditions caused by smoking. Other policies are prohibited indoor smoking, unauthorized tobacco sale for people under 16/18/21 and the gradual increase on excise taxes.

In sum, governmental intervention is important for market efficiency once externalities are put into the picture. Spanning from universal education to the smoking habits of the population, governmental “paternalism” can correct for utility myopia of the economic agents.

Filipe Figueiroa, 765

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Author: studentnovasbe

Master student in Nova Sbe

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