APPLICATIONS OF UTILITARIANISM TO ECONOMICS

ByMaariya

Utilitarianism is a well-known theory whereby an action has to promote the maximum amount of happiness for the maximum number of people. It focuses on the role of an individual in performing these actions. The theory originated with Jeremy Bentham, an English philosopher and economist.

The hedonic treadmill theory proposes that people’s happiness tends to return to a relatively stationary point after periods of heightened or fallen happiness. For example, when a person wins the lottery, they feel high levels of happiness due to both receiving the money and the novelty of the experience. As a person receives more money, their expectations and desires rise in tandem, such that they are no longer satisfied with their previous quality of life – they want to experience greater pleasure. This will increase motivation and work ethic, causing an increase in efficiency and thus creating more economic growth.

However, this contradicts the Easterlin Paradox, which states that at a certain point happiness increase doesn’t directly correspond with income growth. This is because there is a certain point at which one’s lifestyle is so high-quality that earning more money won’t have a large impact on their life and so won’t increase their happiness. We can reconcile the two by stating that the hedonic treadmill is true only to a certain financial extent.

The principle of utility states that economic acts are right if they cause happiness and wrong if they cause unhappiness. This idea is heavily linked to the idea of externalities. An externality occurs when the production or consumption of a good or service has either a positive or negative impact on a third party. For example, pollution is a negative production externality because overproduction of goods leads to pollution, which negatively affects society.

Externalities and utility principles are based on the same theory: that every individual action can be judged to have either a positive or negative impact. An externality occurs when face masks are produced. This is a positive production externality because the production benefits society not only by stimulating the economy but also by slowing the rate of Covid-19 transmission. The free market produces below the quantity of face masks which would optimise social benefit because they are primarily concerned with maximising profits. At point Z, producers only care about their own private benefits, but there is also an external benefit of producing face masks. If you take into account both external benefit and private benefit, the marginal private benefit will shift out to point R (marginal social benefit). Point R is the social optimum point, eliminating market failure as it reduces the problem of underconsumption by increasing production. Thus showing that the idea of externalities is based on the utility principle, analysing how the market either over- or underproduces to maximise benefit to society.