Wasting Away in Paretoville: A Reply to Cass Sunstein
Harvard Law & Policy Review, Vol. 1, 2007
8 Pages Posted: 2 Mar 2007
In Willingness to Pay vs. Welfare (posted on SSRN), Cass Sunstein offers a set of notable conclusions. Welfare, not wealth maximization, is the important goal for legal decisions. Willingness to pay (WTP) is not a good measure of welfare if (as usual) information is inadequate and some people are poor. Beyond satisfying basic needs, wealth also is not a good measure of welfare. Substantial wealth redistribution is justified even if it is inefficient in a narrow sense. People often make choices that do not improve their own welfare.
The trouble, in our view, is that Sunstein does not go far enough. He begins his analysis by arguing that WTP is a good measure of welfare in certain "core cases," illustrated by the imaginary city of Paretoville. In Paretoville, people are well-informed, self-interested, and equal in wealth. There aren't any externalities there, and public goods do not play a role. Paretoville is, we argue, an exceedingly peripheral, not "core," case. It should not be the starting point for analysis. It does not call into question Sunstein's sounder insight that WTP is a poor measure of welfare.
Nevertheless, Sunstein can't seem to leave Paretoville behind. If he leaves Paretoville, and WTP along with it, then what of the cost-benefit analysis which he has so fervently promoted and which depends so crucially on WTP? And what of the economic theories from which much of his work is launched? Our simple advice: let them go. There are better destinations ahead. The large importance and generous vision of Sunstein's article lie in his embrace of the egalitarian assumption of the comparability and comparable worth of all human beings. This assumption shatters the old economic theories and drives Sunstein toward a break with the past, perhaps a more fundamental one than he realizes.
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