Incentives, Darling

Two articles in The Economist caught my attention today. The first is an analysis of the non-doms issue in relation to the principles of taxation. Ther is also a brief discussion of this week’s budget, which appeared (as well as proving remarkaby optimistic about the growth prospects for the UK economy) to focus on changing production and consumption levels of demerit goods; namely cars, plastic bags and booze.

The second looks at merit good provision (and more importantly, uptake) in both South and North America.

Governments subsidise (partially or fully) merit goods such as healthcare and education because they benefit individuals and they benefit society. If a parent gets his child vaccinated against an infectious disease, this protects his child but also, crucially, any other child they come into contact with. The problem is that each parent (in theory) only considers the benefits to their own child, thus the merit good is underconsumed and there is less than full social benefit from the vacination programme.

In New York the Opportunity programme gives cash payments to parents and children who make desirable decisions such as going to school and visiting the doctor. But the idea is taken from earlier iniatives south of the border.

The popularity of these initiatives dates back over a decade to Mexico, which replaced unconditional cash handouts to the poor with conditional cash transfers (CCTs). That meant the money had strings attached: it came, for example, as long as children stayed in school, had regular medical check-ups, and infants and pregnant mothers took nutritional supplements. Maureen Lewis of the World Bank argues that CCTs have “caught fire now” because they have worked in a wide range of circumstances, from Brazilian slums to villages in Nicaragua and Mexico.

But should the government be subsidising people for doing the things they should be doing anyway?

Why not? To an economist, this is just another way of internalising an externality - albeit a positive rather a negative one. And after all, we tax them for doing the things they shouldn’t all the time - see the article on Alastair Darling, above.