Very interesting policy framework this time. Am I correct in thinking that while error by omission seems more evil, error by commission is worse in the long term because it diverts valuable public funds that could be of better use elsewhere?
I still can't believe this newsletter is free. thank you.
I would say it depends on the item being redistributed. In the case of polio vaccination, for instance, error by commission might be better than error by omission. But in the case of subsidised water or electricity, starting with a higher rate of error by omission and then aiming to reduce it, might be the better option.
Compared with subsidised water or electricity, vaccination isn’t a transaction intensive policy choice.
If the government is okay with an error of omission, then a transaction intensive policy choice (e.g., subsidised water or electricity) would have a higher omission error. More people are excluded.
If the government is okay with an error of commission, then a non-transaction intensive choice (e.g., vaccination) would have a higher commission error (It is easy to get vaccinated than get a water connection). More people are included.
Polio vaccinationis also transaction-intensive. It's not discretion-intensive like teaching in schools or deciding on who gets small loans,for example.
The error of commission doesn’t just divert the public funds, it produces unintended consequences. As the government spends more it would be compelled to tax more. Bad taxes would then lead to more inefficiencies. As a result MCPF would further increase making the future public spending less efficient.
An error of commission is actually more than 3 times costlier than the error by omission because doing something (usually) involves spending resources. And, as a State, the more you do something, the more you try to recover its costs through taxation. So, you distort the market, produce deadweight loss, increase the MCPF further.
On the error of omission and the error of commission: A long comment 🙈 (from the perspective of the State)
What is an error of omission? I would define it as: Excluding individuals who cannot afford a service at 3x the market price (when the MCPF is 3).
If this is a valid definition, then excluding people who can afford a service at 2x the market price is actually not an error of omission!
Also, accounting for the inefficiencies in public spending would take the minimum threshold for an error of omission to >3x.
On the other hand, the error of commission could lead to insidious consequences. As the government spends more it would be compelled to tax more. Bad taxes would then lead to more inefficiencies. As a result MCPF would further increase making the future public spending less efficient.
Besides the nature of these errors, the capability of the State also matters.
The government may think that its citizens need a service and the citizens may expect the government to provide the service. But the decision to provide the service would involve other factors also. E.g., resource constraints, capacity/administrative constraints etc. If the government lacks the capacity to provide the service, then it should back off. Instead, if the government decides to go ahead with the policy choice it commits an error of commission. Doing anything beyond the State capacity would qualify as an error of commission.
When the citizens demand a service (needy citizens) that the State cannot provide, citizens rob the State of its capacity. This is an example for the voter rationality constraint.
When the government thinks that its citizens need a service when they didn’t demand for it, the government does so because it either fails to acknowledge or be aware of the information constraints.
Any policy that doesn’t take into account the constraints to State action would be a bad policy.
All really good points. Although I'm not sure about "Excluding individuals who cannot afford a service at 3x the market price (when the MCPF is 3)." MCPF measures the average cost to the society, but doesn't discuss how those costs are distributed across individuals in society. Isn't it?
I meant to say that we can use numbers when deciding whom to exclude. MCPF measures the average cost to the society. It is a number that could help the State decide whether to intervene, if so, by how much.
As Kelkar and Shah put it in their book -- if the costs of a public funded healthcare system are 6x (3xMCPF and 2x public spending inefficiency) it only makes sense to intervene if the market failure justifies the presence of an inefficient public healthcare system.
If the State cannot be efficient then it’s better to just exclude everyone and do other things. And yeah, I guess I’m wrong, I need to think more about this.
For me debate around loudspeaker ban in my country is much more important than two foreign countries fighting each other. The discussions around loudspeaker ban will draw/firm-up the boundaries of liberty and personal rights.
Very interesting policy framework this time. Am I correct in thinking that while error by omission seems more evil, error by commission is worse in the long term because it diverts valuable public funds that could be of better use elsewhere?
I still can't believe this newsletter is free. thank you.
I would say it depends on the item being redistributed. In the case of polio vaccination, for instance, error by commission might be better than error by omission. But in the case of subsidised water or electricity, starting with a higher rate of error by omission and then aiming to reduce it, might be the better option.
Right 🙂
Compared with subsidised water or electricity, vaccination isn’t a transaction intensive policy choice.
If the government is okay with an error of omission, then a transaction intensive policy choice (e.g., subsidised water or electricity) would have a higher omission error. More people are excluded.
If the government is okay with an error of commission, then a non-transaction intensive choice (e.g., vaccination) would have a higher commission error (It is easy to get vaccinated than get a water connection). More people are included.
Thank you so much for the response, Pranay 🙂
Polio vaccinationis also transaction-intensive. It's not discretion-intensive like teaching in schools or deciding on who gets small loans,for example.
Right, Pranay 🙂
I have learnt a lot from you. Felt so happy that you took the time to respond to my comments. Thank you!
Thanks for engaging. Your interest in public policy is evident. Keep writing!
That is, an error by commission leads to an error by omission elsewhere.
The error of commission doesn’t just divert the public funds, it produces unintended consequences. As the government spends more it would be compelled to tax more. Bad taxes would then lead to more inefficiencies. As a result MCPF would further increase making the future public spending less efficient.
The error of commission is three times costlier than the error of omission, blame MCPF.
An error of commission is actually more than 3 times costlier than the error by omission because doing something (usually) involves spending resources. And, as a State, the more you do something, the more you try to recover its costs through taxation. So, you distort the market, produce deadweight loss, increase the MCPF further.
MCPF takes these costs into account.
This was a great read. Thanks!
On the error of omission and the error of commission: A long comment 🙈 (from the perspective of the State)
What is an error of omission? I would define it as: Excluding individuals who cannot afford a service at 3x the market price (when the MCPF is 3).
If this is a valid definition, then excluding people who can afford a service at 2x the market price is actually not an error of omission!
Also, accounting for the inefficiencies in public spending would take the minimum threshold for an error of omission to >3x.
On the other hand, the error of commission could lead to insidious consequences. As the government spends more it would be compelled to tax more. Bad taxes would then lead to more inefficiencies. As a result MCPF would further increase making the future public spending less efficient.
Besides the nature of these errors, the capability of the State also matters.
The government may think that its citizens need a service and the citizens may expect the government to provide the service. But the decision to provide the service would involve other factors also. E.g., resource constraints, capacity/administrative constraints etc. If the government lacks the capacity to provide the service, then it should back off. Instead, if the government decides to go ahead with the policy choice it commits an error of commission. Doing anything beyond the State capacity would qualify as an error of commission.
When the citizens demand a service (needy citizens) that the State cannot provide, citizens rob the State of its capacity. This is an example for the voter rationality constraint.
When the government thinks that its citizens need a service when they didn’t demand for it, the government does so because it either fails to acknowledge or be aware of the information constraints.
Any policy that doesn’t take into account the constraints to State action would be a bad policy.
All really good points. Although I'm not sure about "Excluding individuals who cannot afford a service at 3x the market price (when the MCPF is 3)." MCPF measures the average cost to the society, but doesn't discuss how those costs are distributed across individuals in society. Isn't it?
Yes 🙂
I meant to say that we can use numbers when deciding whom to exclude. MCPF measures the average cost to the society. It is a number that could help the State decide whether to intervene, if so, by how much.
As Kelkar and Shah put it in their book -- if the costs of a public funded healthcare system are 6x (3xMCPF and 2x public spending inefficiency) it only makes sense to intervene if the market failure justifies the presence of an inefficient public healthcare system.
If the State cannot be efficient then it’s better to just exclude everyone and do other things. And yeah, I guess I’m wrong, I need to think more about this.
Thank you so much for the response, Pranay 🙏🙂
A rate of inflation that’s higher than government bond yields will pare down the debt to GDP ratio and allow it to fund more welfare schemes.
Can you explain this.?
For me debate around loudspeaker ban in my country is much more important than two foreign countries fighting each other. The discussions around loudspeaker ban will draw/firm-up the boundaries of liberty and personal rights.