Won't somebody think of the opportunity cost?

A classic mistake in any public policy debate is to only point to the benefits and accounting costs. We are often told that such a policy will benefit New Zealanders in way X (such as providing them with warmer houses) and will only cost so much ($1.5b, for example). Comparison of these allegedly leads us to good public policy.

This seems reasonable, but to any economics student the mistake is obvious - it misses out opportunity cost, or what is foregone to pay for the policy. The reason it does this (and this is done all the time, at least here in New Zealand) is that often these arguments rely on a very blurred line between benefits and externalities.

One way to catch yourself from doing this, and to also explain the point I am trying to make, is to think to yourself - would people buy this if they were just given the equivalent amount of money? If they would, then your policy seems a little redundant. But few public policies are like this. The real issue comes when people would not buy the thing you would have the Government provide/subsidise, etc. You should then think to yourself, why not?

Perhaps there is a benefit or cost that goes to others when they buy it that they won't take into account. This is a decent reason, although it leads to other fallacies which I will hopefully discuss later. Perhaps people are cognitively biased in some sense that you are not (i.e. addicted to something), so their choices will not actually make them happier. Perhaps the spending serves some legitimate redistributive purpose.

However, if none of these options are true, it seems that you are left in a tricky place with policy. What you are doing is making people less happy than they could be! Surely this shouldn't be your goal. Sadly, this is the case with a lot of Government spending, but it is particularly evident in the recent decision to subsidise home insulation (and not even means-tested, at that). The supporters of the plan are happy to point to the many benefits we will see, and as someone who lives in a freezing student flat I can more than sympathise with this. However, why aren't people insulating their houses already? The answer is surely that there are other things they could buy that would make them much happier, like paying off their debts, or buying food.

It is an unfortunately masochistic political system where politicians must make society less well-off to stay in power.