Politics and Enforcement of Policy Instruments

Acommon assumption is that policymakers design policies to maximize something like a social welfare function. Although this assumption is not very realistic, it is often made because it allows for the use of tractable mathematical models. ¹ Even if policymakers did try to maximize such a function, and even if the welfare function were a simple utilitarian one, the design of policy might be complicated by market failures, information asymmetries, and other problems. If the social welfare function is more complex (e.g., including “equity” as an independent element), then the design of policy instruments must meet several goals. Also, complex individual utilities—for example, including altruism or relative (rather than absolute) consumption—have profound consequences for the design and implementation of policy instruments ² .