Legal Commentary

Yesterday I described some intuitive support for declining marginal utility.  But commenter freight train demands that I back up:  "What is the definition of marginal utility?" he asks.

Is...[utility] measured across the desire or across the fulfillment of the desire? What's the measure of that "worth?" ....Is [it] measured by what someone wants - ie, thinks will result from an additional dollar - or what they actually get from that additional dollar?

I agree: I cheated.  We can't figure out whether the marginal utility of income declines until we know what utility is.  After the jump, I expand upon and ultimately avoid the question.

"I demand that you define your terms and defend your

fundamental assumptions, or I will RUN YOU THE HELL OVER."

Some people take the position laid out by GJELBlogger in the comments to my previous post and say that utility (or well-being) is equivalent to happiness (also sometimes referred to as "subjective well-being").  This is an older view that has recently been revived in the legal academy and elsewhere. 

Most economists and many law professors equate well-being with preference satisfaction, whether actual preferences or ?laundered? preferences (that is, preferences for things that informed, rational individuals acting only out of self-interest would prefer).

Still others believe welfare to consist in the satisfaction of certain ?capacities,? or objective goods.

I'm not going to take a position on the definition of utility, at least for this series of posts, but freight train is right that this matters tremendously for lots of reasons.  Some of the supposedly relevant studies that I'll discuss in a subsequent post are of only limited importance if you take the view that, say, utility is equivalent to preference-satisfaction.

And then freight train takes it to the next level:

[S]hould tax policy be based on what individuals want most? A poor person may feel the lack of a loaf of bread, while a rich person may feel the lack of a private jet, but does that mean that redistributive tax policy needs to respect both desires equally?

So freight train is challenging this whole way of thinking about tax policy: why focus on maximizing utility, he asks, instead of on, say, fairness?  There is a lot to say on this topic, but for this series of posts I will just say that much current tax legal scholarship focuses on maximizing utility.  Thus, whether you agree with that approach or not, you (by which I mean, of course, me) might want to grapple with the key assumptions that often accompany it.  And one of those assumptions is that income has declining marginal utility.