Is there an economic rationale for subsidizing girls wearing mini-skirts? By this I do not mean whether we should subsidize or not, but to what extent doing it would be welfare improving. As a dismal scientist, I suggest that there could be- and that in any case the thought experiment is challenging.

The explanation is as follows. Assume that women make their dressing decisions caring about whether they like or not the way they look like. On the other hand, men are not indifferent between different alternatives; they actually prefer mini-skirts since they are nicer to watch. Under these conditions, we have what we call “an externality”; a situation when the decision of one agent affects another agent- we might call it a “visual externality”- the the number of girls wearing mini-skirts will typically be suboptimal (insufficient) from a social point of view- in the very same way as the factory will over-pollute the river if it does not support its cost.

To see what I mean, think about it in the following terms. Imaging that we have a house which can be warmed. Girls actually would like to wear mini-skirts, but only if the house is warmed; the number of girls wearing mini-skirts increases with warming. However, warming the room is not free: someone should pay for it. Typically, girls will balance their preference for wearing miniskirts and the cost of warming the house. Now, ask youself whether the level of warming will be higher when we allow men or women to contribute: that’s the externality. The maximal amount that men would be willing to pay for warming is a good aproximation.

This problem was recognized a century ago by the economist A.C. Pigou and proposed that it could be solved via taxes and subsidies. The issue would be: extract taxes from miniskirt-enjoying-men and transfer that amount of money to women who accept to wear miniskirts. If you know the amount that men would be willing to pay, you can properly adjust it. There is, therefore, a prima facie case for subsidizing miniskirts if our assumptions are correct.

You might think that all this economic stuff is just crazy, but let me follow the economic logic a little bit further. A liberal economist would counter-argue in a rather automatic way that, if there is a problem, the market could solve it. Couldn’t it? Hypotetically, it could. The market for miniskirts has a demand (men watching miniskirts) and a supply (women wearing miniskirts) why don’t we see deals between men and women to wear miniskirts as we do, say, in the tomato market? The common sense answer would be “well, because wearing miniskirts is not a marketable activity, unless you do it professionally” The economist’s answer is a bit more sophisticated, but actually says more or less the same thing.

The liberal economist is appealing, maybe unconsciously, to what we call the “Coase theorem”. The Coase theorem says that, when transaction cost are zero and property rights are well distributed, then market exchange and bargaining will lead to a efficient outcome. What does this actually mean? The issue is, if making a deal has no cost, then you will reach a good deal. The Coase theorem is a mathematical truth which means that it holds whenever its assumptions are fulfilled. So, coming back to the miniskirts case, if the commonsense view is correct, some of its assumptions should not hold.

In fact, they don’t, and that is the main point of this post. The commonsense view says that nobody would accept, either paying or being paid for wearing miniskirts; that doesn’t mean they do not value it, it just means that none would accept to consider it an object of trade. This phenomena is called by behavioural economists “procedural utility” which means that people do not only care about about outcomes, but also about how outcomes are reached. It might happen that men or women just find abhorrent to pay or being paid for that stuff (it would be a kind of “ethical preference” where people care about what is right or wrong, not only about what is convenient) or maybe they are quite tolerant about dignity but there is some form of social sanction for accepting such a deal (there would be a “social norm” which forbids it). This is the very same issue as when people are reluctant to sell their organs for ethical reasons.

Whatever the reason- ethical preferences or social norms- this constitutes a market failure in the sense that the spontaneous order solution leads to an outcome that is not the one that everyone would have desired if deciding collectively and rationally. The point is therefore that social norms and ethical preferences can be a source of transaction costs- impeding mutually beneficial trade and the Coase theorem to hold- and therefore cause market failures.

This is, however, not all the story. There are two things I’d like to point out. The spontaneous order solution could be less inefficient than one could think and men could be willing to “pay” for it, so the number of girls wearing miniskirts will be close to the optimal level. How do men pay? Typically, not with money- due to the ethical preferences and social norms stuff- instead, with “attention”, “gifts” or other ways. Girls actually know that dressing themselves in a sexy way will increase their chances to be succesful among boys,and will balance this chances of succes againt their “dislike” of wearing a miniskirt. We see therefore that the issue “tends” to solve itself- boys reward miniskirts- but only in an indirect way. The solution is also imperfect: the amount of reward does not account for the satisfaction got by boys watching miniskirts- in economic terms “the gains from trade are not exhausted”.

There is, therefore a rather strong case for taxing boys and subsidizing miniskirts-wearing-girls. Does this sounds absurd? It does, but it is not. Actually, it is something that is actually done with some frequency in analogous situations. For example; not long ago I was invited to a club were they celebrated the “miniskirt party”. It was so called because girls wearing a miniskirt were granted free access and a drink while the rest of us had to pay. This is, in fact, a way of arranging transfers in the same way a tax scheme would. The same rationale operates for dress codes in private parties where individuals access is conditioned on proper dressing.

All this suggest that there is indeed a good case for subsidizing miniskirts. Now, I do not think, nor does economics theory suggest- just in case someone did not understand that this was a thought experiment written in a provocative way- that miniskirts should actually be subsidized. The arrangement is likely to be unfeasible. First, it would be hard to know who to tax- who does really enjoy miniskirts? how much?. Second, we are likely to have the very same problems as in the Coasian solution- people are unlikely to accept voting for paying/receiving money for wearing miniskirts for the very same ethical preferences and social norms reasons.

The point was, however, to show that institutions -such as moral and social norms- that evolve spontaneously can be a source of transaction costs causing inefficiency, and this is especially true in the case of “non economic phenomena” where what we can call “animal spirits” are strong; it does also holds in the economic realm, in, for instance, wage setting.

This entry was posted on Jueves, Noviembre 5th, 2009 at 22:42 and is filed under English Version, ciencia recreativa, economía normativa, frikismo metodológico . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.