On Budget Allocation in Government Agencies

It is commonplace today for economists to consider many decision problems as equivalent to maximization of an objective function subject to constraints. The tools of microeconomic analysis developed through the study of the household and the firm are now being applied in ways that would have startled many of us even ten or twenty years ago. This is particularly true in the federal government where microeconomic analysis under the name of program budgeting is influencing decisions on everything from the SST (supersonic transport) through anti-missile defense to the future of Indian reservations. An important lesson to be learned in such applications is that the hallowed compartmentalization of the discipline of economics into segregated studies of positive and welfare considerations can be counterproductive. If an individual or firm, or particularly, a government agency can be said to be maximizing a utility or welfare function, that maximand ordinarily involves both positive and welfare?efficiency and equity? considerations.1 This fact is universally recognized but also nearly univer? sally ignored, or at least bypassed, in making policy recommendations. For if a government agency is interested in other considerations besides economic efficiency, substitution or tradeoffs between efficiency and equity are possible. Then to a typical decision maker, at any given level of welfare an incremental decrease in efficiency of operation of the economy may be sacrificed for an improvement in income distribution, or an increase in the employment rate?in short, efficiency is exchanged for equity. Similarly, perhaps equity itself can be defined in such a way that at the margin some decrease in per capita income may be traded for an increase in the employment rate. An agency may have a two-fold mandate to create jobs and raise the income of impoverished regions of the country. Job creation may be more efficient in affluent than in poor areas, so it is necessary to weigh the merits?on the margin?of incre? mental job creation vs. incremental improvement in income distribution. Too often, however, economists remain aloof from such deliberations

Economic efficiency · Economics · Equity (law) · Government (linguistics) · Market economy · Microeconomics · Political science · Public economics · Social welfare function · Welfare · Economic theories and models · Fiscal Policy and Economic Growth · Law · Monetary Policy and Economic Impact