Metsfanmax wrote:BigBallinStalin wrote:That route might maximize net utility greater than the $500 donation, but with utility = f(wealth,whatever else), then we can conclude either way.
I'm asking because you're insisting that there's an opportunity cost, but I am talking about donations that go above and beyond a person's necessary expenditures. I'm saying that if you have $500 of disposable income, you produce the most utility by donating it directly to poor people. So it's important to distinguish between disposable income, and restructuring necessary expenditures to benefit poor people.
With any action, there is an opportunity cost. An opportunity cost is the foregoing of the next best alternative. It serves as a standard for determining one's utility-maximizing action. For example, when I choose to respond to your post, I incur an opportunity cost, like doing something more important. Nevertheless, the value of my current action is greater than the OC, so in this case I'm maximizing my utility. If OC > Value(current action), then I'm failing to maximize utility; I'm being inefficient, thus being wasteful.
Assume everyone seeks to maximize utility, and they face a series of choices between exchanging and donating. It follows that there's an OC for each choice. To simplify, let's assume Captain Picard is
almost at the optimal point between trading and donating. He must choose between 1 trade or 1 donation. If he chooses correctly, he attains that optimum. If he chooses poorly, he moves an additional choice away from the optimum. If Picard chooses to trade, he foregos the net utility of donating. If he chooses to donate, he foregos the net utility of trading.
In other words, Picard's utility = f(wealth,whatever else).
(A) Donate to 1 person, thus OC: trade. MU = f(-Marginal wealth, (?)Marginal whatever else).
OC: MU = f(+MW, (?)MSE).
(B) Trade and get 1 good in exchange for $(change)MW, thus OC: donate. MU = f(+MW, (?)MSE).
OC: MU = f(-MW, (?)MSE).
Note how each decision incurs an opportunity cost, so Picard can fail to maximize utility if he chooses incorrectly.
What's the problem? We don't know the marginal change in utility of "something else" (whatever that list of variables may be, which differs for everyone), so we can't really say which option would maximize Picard's utility and guide him to the optimum.
Now, we'll complicate the problem by adding 3rd party effects.(A) Donate to 1 person, thus OC: trade. MU = f(-MW, (?)MSE) _plus_ Donee's MU = f*(+MW, (?)MWE).
OC: foregone MU = f(+MW, (?)MSE) _plus_ Everyone's* MU = f*(+MW, (?)MWE).
(B) Trade and get 1 good, thus OC: donate. MU = f(+MW, (?)MSE) _plus_ Everyone's* MU = f*(+MW, (?)MWE)
OC: foregone MU = f(-MW, (?)MSE) _plus_ Donee's MU = f*(+MW, (?)MWE).
*Everyone who's involved in the production process which led to that one good.
What's the problem?
(1) We don't know which option maximizes net utility for the whole world because of the same problem with "something else."
(2) Donating to poor person X might result in a net decrease in utility because you're foregoing the opportunity to trade with others--including poor people--who could've experienced greater utilities than person X. Although the $500 is distributed across a long chain of suppliers and demanders, it contributes to the maintaince of that production process. This increases the likelihood of continued streams of income. You can scoff at this all you like, but you'll be scoffing on all their utilities.
Therefore, your $500 donation choice might maximize net utility greater than the $500 spent on trade, but with utility = f(wealth,whatever else), then we can conclude either way.
If the trade maximizes net utility, then donations fail to maximize net utility. And vice-versa.
It seems we're at a conundrum, but there is an answer. It's obtained by thinking about the following:What explains the rapid increase of wealth from the mid 1700s to today? And why are some countries richer than other countries?
Are the rich countries richer because of donations? Or is there something else which more heavily drives the origins and continued growth of their wealth?
(Hint: it's hardly donations).