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preamble: theory and policy

→ there is in many cases a disconnect between economic theory (the models you have learned in
micro and macro) and practice (in particular policy)

→ this course tried to bridge the theory knowledge with real problems faced by policy makers
→ we start with some methodological foundations (chapter 1)
→ the describe some limitations of economic policy (chapter 2)
→ we then study three main economic policies
→ fiscal policy (chapter 3)

→ monetary policy (chapter 4)

→ growth policy (chapter 5)
→ this means we will focus mostly on macro policies (fiscal and monetary), but we cannot
disregard microeconomic policies (housing, education, competition, health, environment,
productivity) which we are currently probably the most important for countries at eu level

economic policy is messy

→ economists (and noneconomists) have different views on the type of society they want to live
in: so, policies are not neutral, they reflect the values of policy makers and, at least to some
extent, of those who elected them (ideas)
→ there is some agreement between economists on the main functions governments have, and
the associated objectives. however, achieving the objectives is complex and complicated - it
involves making trade offs, dealing with interest groups, etc. (interests)

→ where possible, we should compare the (expected and uncertain) outcomes of alternative
policies using transparent decision criteria (reflecting our values and preferences as a society)
and replicable evaluation methods: this helps improve the quality of policy making and its
outcomes
→ but ultimately, the decisions are political - so its crucial to have good politicians. for that we
need good institutions

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 → but, good institutions affect and are affected by the “quality” of civil society (that’s us), so to
have good institutions and good politicians we need to start with us, the people

three approaches to economic policy

1. “the is” - positive: the economist limits herself to the study of the effects of public choices
on the economy - objective, fact based, statements should be tested and accepted/rejected

2. “the should” - normative: the economist seeks to influence public choices by making
recommendations based on her expertise - opinion or ideology based

3. political economy or political economics: the economist takes political decisions as a topic
for research and studies the determinants of policy decisions - it analyses how public policy
is developed and implemented

positive economics
→ the economist measures and examines the effects of different policy measures on economic
variables
→ economic policy choices and policymakers are treated as exogenous: they impact on the
outcome economic variables (e.g. prices, output, or employment) without being influenced by
these variables
→ e.g. increasing public spending on schools and hospitals, increase fuel tax, increase university
fees, increase interest rate, etc.

normative economics
→ the public decision maker/government is regarded as a social planner, and the economist as an
engineer who tells him which measures to select for reaching certain goals
→ normative economics frequently implies giving up so called first-best solution for second-best
solution because of informational, institutional, or political constraints
→ the economist acts as an adviser to the government/policy maker and examines which set of
decisions can be best serve explicit public policy purposes
→ normative economics relies on the tools from positive economics to assess the effects of
different possible policy decisions, but the economist now manifests specific social preference

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 towards the alternative policy outcomes (normative value judgements)

political economics or political economy

→ policy making is the subject of research: we want to understand the political determinants
of policy decisions
→ the government is regarded as a machine directed by politicians, e.g. by rational players
whose behavior follows specific objectives and faces specific constraints - the government is no
longer regarded as a benevolent dictator
→ it seeks to model the behavior of governments (technocrats and politicians) in order to
determine how the governance and the mandate of these agents influence economic performance
→ the choice of a policy regime regarding product, capital, and labour market regulations
involves preferences and trade offs between efficiency and equity, economic interests of different
players, etc.
→ political economy is essential from a positive point of view (to understand why economic
policy does not achieve its objectives) and from a normative one (to evaluate the chances of
success of different interventions)

three approaches to economic policy

→ positive economics, normative economics, and political economics coexist and the modern
approach of economic policy draws on all three
→ positive economics remains necessary to the understanding of the likely effects of public
decisions
→ normative economics helps address the trade offs involved in policy choices
→ political economics allows understanding the complex dynamics of doing economic policy in
real world constraints (e.g. cost-benefit analysis, ex-ante and ex-post, human vs ai decision
makers)
→ bottom line: social planner is not omniscient, omnipotent or benevolent

what do policy makers do?

→ who are they?

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 → at national level: ministers, their advisers, civil servants, chief scientific advisers,
parliamentary committee members, advisory staff, etc.
→ it can also include the staff of a government agencies (environmental agencies) with
expert knowledge and a policy mandate on a specific area
→ it also includes local administration (municipalities, metropolitan region mayors, etc.)

→ at the supra national level it can include eu commission, ecb, imf, etc.
→ policymakers do not behave as in theoretical models, the main tasks of economic
policymakers can be grouped into six categories:

1. set and enforce the rules of the economic game

→ economic legislation provides the framework dor the decisions of private agents
→ enforcement covers competition policy and the supervision of regulated markets such
as banking and insurance
→ in eu member countries, national economic legislation is increasingly determined by
eu law (e.g. free movement of goods, people, capital, competition law, labour rights,
etc.)

2. tax and spend

→ government spending by type of function
→ budgetary decisions affect:
→ household’s and firm’s income and behavior through taxation and social insurance
→ productivity through infrastructure, research, and education spending
→ aggregate demand through changes in spending or overall taxation

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 3. issue and manage the currency
→ the choice of a mon etary and exchange rate regime is one of the most important
single decisions a government can make
→ defining and implementing monetary policy is the function of the central bank, which
is responsible for setting interest rates, maintaining the value of the currency, insuring
that the banking system does not fall short of liquidity

4. produce goods and services

→ this is much less a government responsibility today than it used to be in the first
decades after world war ii
→ however, most governments are still responsible for providing health care or
education services, and some still own public enterprises in sectors like transport or
energy

5. fix problems or pretend to

→ ministers are frequently held responsible for a vast array of issues, from financial
market turmoil to wage negotiations, company mergers, and plant closures and
relocations
→ many problems are beyond their means, but they can still try to influence private
decisions - or at leat pretend to

6. negotiate with other countries

→ governments negotiate with other countries on trade liberalization and the definition
of global rules
→ they participate in the governance of global and regional institutions (imf, wb, wto,
eu)
→ they participate in informal forums (g7, g8, g20, etc.) to hold discussions on global
problems such as development, global warming, etc.

note: the scales at which these roles are taken has also become more complex, many national
governments only perform a set of these activities (vs supranational)

a simple representation of economic policy: objectives, instruments and institutions

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 → to provide a simple representation of the common features of economic policy we can focus
on its
→ objectives
→ instruments
→ institutions

objectives
→ the objectives of economic policy are numerous and sometimes contradictory. common
examples include:
→ improving the standard living of population
→ achieving full employment
→ maintaining price stability
→ reaching a fair distribution of income
→ alleviating poverty
→ etc.
→ economic policy has several objectives generally with ambitious targets, irrespective of the
difficulty of reaching them simultaneously
→ objectives are often stated in government manifestos
→ politicians like to increase the list to showcase their “power”

instruments
→ instruments are also numerous, ranging from micro to macro
→ traditional instruments include monetary policy (the setting of official interest rates) and
fiscal policy (the choice of the levels of public expenditure and taxes). economic policy is often
presented as a combination of these two policies only…
→ however, it can and must rely on a variety of microeconomic instruments: regulation,
direct and indirect taxes on households and companies, subsidies, social security transfer,
competition policy, etc.

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 institutions
→ institutions - the rules and legislation governing the relationships and contracts between
agents as well as the frameworks for economic policy decisions
→ include formal constraints (rules, laws, constitutions), informal constraints (norms of
behaviour, conventions, codes of conduct), and the ability to enforce them (e.g. short term
rental, social security, labour legislation, public procurement procedures)
→ institutions affect directly market equilibrium and the effectiveness of policy instruments
and hence economic outcomes, e.g. fdi, economic growth, compliance with covid19 lockdown
restrictions
→ institutions represent a kind of social capital (informal institutions, norms of behavior, codes
of conduct)
→ they evolve, can be reformed, or can disappear, but they have some permanence and can be
taken as given for the traditional analysis of policy choices
→ there is evidence that the quality of government and its institutions matters for social and
economical development across the eu and that is an important determinant of regional growth
→ e.g. world bank policy has focused on the strengthening of institutions in developing countries
→ examples of institutions:
→ features of the organization of product, labour, and capital markets (i.e. the bankruptcy
code, the rules governing employment contracts, the legislation on takeovers)
→ framework for economic policy decisions (i.e. budgetary procedures, the statute of the
central bank, the exchange rate regime, the rules governing competition, etc.)
→ includes non public institutions such as trade unions, which are private associations but
affect the functioning of labour market, rules governing the legal system, social security,
health, education, etc.

trade-offs, structural reforms and better institutions: trade-offs

→ suppose a governmetn has n target varieables y1, y2, …, yn represented by a vector y =
(y1,y2,…,yn) with corresponding objetives ~y1, ~y2, …, ~yn

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 → its preferences can be summarized by a loss function l that measures the welfare loss
associated with the gap between the values taken by the target variables yi and their objective
values ~yi:

→ to meet the objectives, there are p independent policy instruments that can be grouped
in a p-dimensional vector x = (x1,x2,…,xp), and we also have a set of institutions
represented by i
→ the functioning of the economy can be represented by y = hi(x)
→ economic policy then consists in selecting x such that l is minimized, conditional on
institutions hi(x)

→ economic policy consists in setting the p policy instruments such that the loss function l is
minimized
→ if p = n, the n policy objectives can all be achieved because there is an equal number of
instruments
→ if p < n and the n objectives cannot be achieved simultaneously, requiring trading off
one objective against another
→ tinbergen rule - to reach n independent policy objectives, the government needs at least an
equal number of policy instruments p
→ the problem is that governments generally have many objectives but only a limited number
of instruments so trade-offs are part of governments’ everyday life, if governments know the

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 trade-offs, their choices are conditional on their preferences
→ if n > p, the government faces trade-offs: it will chose values for (x1, x2, …, xn) such that,
at the margin, it is not possible to improve on any of the targets without reducing welfare due to
divergence on other targets. this is illustrated by the equations below for any pair (i,j) of target
variables:

trade-offs, structural reforms and better institutions: structural reforms

→ trade-offs illustrate the limits of economic management
→ to modify economic policy trade-offs governments often implement structural
reforms that improve their institutions
→ according to the imf, structural reforms are “measures that, broadly speaking, change
the institutional framework and constraints governing market behaviour and outcomes”
→ you will discuss some of the main recent structural reforms in the tutorials as part of the
texts for discussion
→ consider we have two objective target variables y1 and y2 (e.g. inflation and unemployment)
but only one instrument x (interest rate), and i represents institutions

→ policy instruments x can be replaced in both equations

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 , so that we obtain a function illustrating the existence of trade-offs between y1 and y2,
conditional on institutions i:

→ with institutions i and only one policy instrument x we cannot increase y1 without reducing
y2, economic management (movements along the curve, or trade-offs)
→ to obtain an new nature of trade-offs we need to carry out structural reforms by changing
institutions, in this case from i to j (shifts the curve outward)

→ it is common but wrong to associate structural reforms with supply-side policies:

→ making the central bank independent, choosing a new currency regime, or adopting a
framework for budgetary policy are structural reforms because they aim at improving
existing trade-offs between various objectives
→ contrarily, a change in tax rates, which is mostly a supply-side measure, does not have the
character of a structural reform
→ in fact, most structural reforms have been supply-side, explaining the confusion

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 → structural reforms are often viewed as having negative short-term effects, but positive long-
term effects (e.g. transition of former planned economies of central and eastern europe and the
former ussr to market economies)
→ these inter-temporal effects of structural reforms raise political economy issues. for a
democratic government facing a reelection, undertaking reforms with negative effects in the
short term will not make voters happy

the whys of hows of public intervention

→ why is public intervention needed?
→ what are the objectives of public intervention?

three broad functions of economic policy

→ allocation of resources (i.e. improve efficiency)
→ macroeconomic stabilization in response to exogenous shocks that move the economy
away from internal balance
→ income (re)distribution between people and regions (improve equity)

allocation of resources
→ covers policies relating to the assignment of resources to alternative uses

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 → public interventions targeting the quantity or/and quality of factors of production
(capital, unskilled and skilled labour, technology, land, etc.), and their sectoral or regional
distribution
→ provision of public goods such as infrastructure building or environmental
preservation are included in this category
→ competition policy
→ labour market reforms

macroeconomic stabilization
→ covers policies aiming at bringing the economy closer to balance or equilibrium
→ policies implemente in response to exogenous shocks that move the economy away from
internal balance (i.e. full employment and price stability)
→ this function is associated with the role that keynesian economists usually assign to
monetary and budgetary policies

→ the differences between allocation and stabilization functions refer to the distinction between
long term output growth and short term fluctuations around the trend:
→ allocation policies aim at increasing the maximum level of output that can be reached
without creating inflation (potential output)
→ stabilization policies aim at minimizing the divergence between actual and potential
outputs (i.e. output gap)

→ consider the production function f, where y is the output, k is the capital stock and n is
employment. k and n depend on time so does f as improvements in technology allow more to be
produced with the same amount of factors

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 → in the short run k is exogenous (kt = ~kt). ~nt is the employment level when the
unemployment rate is at the equilibrium level (what is the equilibrium level of unemployment?).
potential output can be defined as:

→ output gap - difference between the demand determined output yt and the supply determined
potential output ~yt, measured as a percentage of the potential output

→ a negative output gap means that production is below potential, implying non equilibrium
(or involuntary) unemployment
→ a positive output gap means that production is above potential. it can occur when there is
excessive demand leading to pressure on resources to work beyond usual capacity (shift
work, overtime work), which means there will also be an increase in the marginal cost and
inflationary pressures. thus, a positive output gap is not an indication of positive
performance. ideally, we want the output gap to be zero.

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 income (re)distribution
→ covers policies aiming at correcting the primary distribution of income
→ progressive taxation policies and social transfers are key instruments to this end
→ redistribution has a different scope of allocation and stabilization because it addresses the
distribution of income within society

why is public intervention needed?

a. allocation
→ the first theorem of welfare economics (by vilfredo pareto) establishes that under
certain conditions any competitive market equilibrium is pareto optimum - i.e. it is not
possible to improve the welfare of someone without reducing that of someone else (i.e.
efficiency of competitive markets)
→ this requires complete markets, no market power and perfect information
→ however, in the presence of market failures there is justification for public intervention
because the market prices do not reflect the true social cost or benefit and hence market
outcomes may not be optimal. this is the market failure approach of neoclassical
economics
→ government intervention is justified when it is able to remedy market failures, i.e. to
improve the efficiency of resource allocation in comparison to the market outcome
→ the arguments for allocation related intervention are studied in microeconomics and
public economics and recommended regulatory policies, corrective taxation, the public
provision of a number of goods and services, or public subsidies
→ the most frequent reasons for such failures are the presence of:
→ externalities
→ public goods
→ imperfect competition and monopolies
→ information asymmetry
→ market incompleteness (i.e. market failures)

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 is the covid19 pandemic a market failure?
→ covid19 as an infection externality?
→ how do governments respond to externalities?
→ specifically, what does the government do with covid19 related externalities?
→ what is the logic for government funding of innovation for covid19 vaccines and treatment?
why don’t private markets provide adequate investment?
→ what are important economic costs of the covid19 pandemic? what costs aren’t included in
gdp?

externalities
→ in the presence of externalities, the private cost of a resource or the private benefit from
production does not coincide with the social cost or the social benefit
→ in the case of negative externalities, the firm or consumer tend to over produce or over
consume resources so the market equilibrium does not equal the social optimum (e.g. car
producer, drivers)
→ in the case of positive externalities, the firm or consumer tend to under produce or
under consume resources so the market equilibrium does not equal the social optimum (e.g.
education, health, innovation)

public goods
→ the reason for market failure is one of missing markets

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 → the non rivalry and non excludability nature of public goods means that people may not
reveal their true preferences for the good - that is, they undervalue the willingness to pay for the
good because they know they can consume/access the good without paying for it (free rider
problem)
→ the free rider problem leads to sub-optimal under-production of the public good

monopolies and imperfect competition

→ level of output of monopolist is lower than under perfect competition and the price
charged in higher
→ government can set up competition policy or market regulation to avoid monopolist
power
→ under perfect competition, the marginal revenue is the market price of the product and profit
maximization leads to a social optimum
→ if a firm holds a monopoly position or, more generally, has some market power, it takes into
account the downward slopping demand curve for its product and the fact that its marginal
revenue is less than the market price
→ in comparison with the perfect competition outcome, this leads the firm to reduce quantities
sold and increase price, reducing consumer welfare
→ public intervention aims at restoring perfect competition conditions, for example, by
blocking mergers leading to excessive market power
→ however, when production involves
high fixed costs or when there are

increasing returns to scale, larger firms or even monopolies are thought to be more efficient - we

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 call this a natural monopoly
→ can you think of common examples of natural monopolies?
→ examples of natural monopolies:
→ it is more efficient to have the railway network managed by a single entity than by
several, but this implies regulating its behaviour or subjecting it to potential competition in
order to prevent it from exploiting its monopoly power

imperfect information and asymmetric information

→ competitive equilibrium assumes perfect information hypothesis. however, if information has
a strategic character and if agents use it to their benefit, the market outcome is no longer
necessarily pareto optimum
→
imperfect information is widespread in an economy and affects the
decisions made by firms, households and governments, leading to suboptimum outcomes
→ george akerlof’s market for lemons (asymmetric information and moral hazard)
→
examples:
→ credit market: when the creditor (bank) has less information
than the debtor (company, household) on the risk incurred in lending, the creditor cannot
accurately price the risk in setting the interest rate on the loan
→ your decision to invest in education
→ your choice of degree
→ dating markets
→ credit markets (generally any example of matching markets)

incomplete markets
→ optimality of the competitive market equilibrium relies on existence of markets for all
necessary transactions at all relevant horizons. When such markets are missing, pareto
optimality is not guaranteed
→ typical examples of incomplete markets include quasi-public goods and merit goods such as
infrastructure (transport, water, electricity), education, new technology, and the presence of

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 imperfect or asymmetric information
→ financial (credit, insurance) markets are another example of incomplete markets
→ e.g. getting a loan to finance your education is made difficult by the absence of collateral on
which the loan can be guaranteed. the near absence of a market on which young people could
borrow to finance investment in their own human capital limits access to higher education
→ in the absence of
public intervention private investment in human capital would be suboptimal

note: these arguments for public intervention are linked: e.g. externalities and public goods,
asymmetric information and incomplete markets, etc

b. stabilization

→ public intervention for allocation aims at altering the long run market equilibrium
→ while intervention for
stabilisation aims to limit short term deviations from it

→ keynes gave two reasons for intervention for stabilisation purposes:

1. animal spirits, the instability of private behaviour under the influence of spontaneous
expectations (vs. rational calculation) leading to excessive optimism followed by excess
pessimism

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 2. nominal rigidities of wages and prices stop the self-correcting market mechanisms from
operating and moving the economy back to equilibrium. especially, nominal wage
rigidity implies that the real wage does not fall in a downturn, preventing the
restoration of full employment

→ the combination of private behaviour instability and ineffective self correcting

mechanisms provided a justification for using counter cyclical monetary and fiscal policies to
smooth out economic fluctuations and prevent economic depressions
→ contemporary macroeconomics provides a framework for thinking about the role of
stabilisation policy, and for distinguishing between situations where it is effective and situations
where it is ineffective
→ this approach is based on a
simple aggregate supply-and-demand framework (ad-as model) that explains the equilibrium
price level and output as a result of the relationship between aggregate demand and aggregate
supply, i.e. the relation between potential output and product price (as) and between aggregate
product demand and product price (ad)

→ aggregate demand (ad) depends negatively on the product price as a rise in prices reduces
the real values of nominal assets and consumption
→ aggregate supply (as):
→ in the short run, aggregate supply depends positively on the product price because in the
presence of nominal rigidities (of wages) a rise in the price level reduces the real wage and
makes production more profitable
→ in the long run, aggregate supply is
fixed as unemployment is at its equilibrium level and output is equal to potential output, so
the curve is vertical

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 → two distinctions need to be made:

1. variations of the quantity supplied or demanded in response to a change in the product

price (a move along the supply and demand curve

2. exogenous shocks (shift of the whole curve) to supply and/or to

demand. supply shocks (e.g. change in oil price, technological innovation) and demand
shocks (e.g. rise in public spending) have become part of every macroeconomic
policymaker’s toolkit

→ in the short term:

→ positive exogenous shock on aggregate demand shifts the demand curve to the right,
moving equilibrium from e to a’: it increases output and price simultaneously

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 →
positive exogenous shock on aggregate supply (e.g. reduction in oil price or technological
innovation) shifts the aggregate supply curve to the right moving equilibrium from e to b’:
higher output level but lower price

→ in the long run:

→ aggregate supply curve is vertical and fixed (at the level of potential output)
→
exogenous shocks to the aggregate demand only lead to increases in prices (and no change
in output)
→
exogenous shocks to the aggregate supply lead to an increase in output (and reduction in
the price)

→ in summary

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 → the effectiveness of expansionary demand policies in the short term depends on the slope
of the short term aggregate supply
(as) curve
→ demand policies in the long run are fully ineffective (only increase prices)
→ furthermore, while fiscal or monetary expansionary demand polices affect the ad curve,
they do not affect the as curve
and thus are ineffective in response to supply shocks

c. redistribution
→ the argument for intervention is that the equilibrium competitive market determined
distribution of income does not necessarily ensure social justice
→ the motivation for intervention is a
pure equity concern
→a
normative criterion is generally required to decide what constitutes an improvement in
equity and which allows comparing different income distributions
→ redistribution often involves an equity efficiency trade off when the redistribution of
income leads to efficiency loss because taxes and transfers reduce the quantity of production
factors and the way they are allocated to alternative uses (e.g. work vs. leisure)
→ however, there can also be
equity efficiency complementarity when redistribution improves efficiency: for example,
public policies aiming at ensuring access of the poor to education and health care frequently
yield efficiency gains by improving the productivity of the labour force

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 evaluation of economic policy: decision criteria
→ the general purpose of economic policy is the satisfaction (utility) of
households
→ typically, the
utility of each household includes:
→ consumption of goods and services
→ amount of leisure
→ working hours (i.e. labour supplied)
→ working conditions
→ social relations
→ quality of the environment
→ etc.
→ for consumer i utility u can be written in a very general formulation:

static vs dynamic considerations

→ instantaneous or static utility is insufficient: there would be no reason to invest since
investment increases the quantity of goods and services available for future consumption but
reduces current consumption
→ an inter temporal utility criterion is therefore needed, which requires defining a discount
rate ρ in order to aggregate utility overtime:

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 → the intertemporal utility u(i) of consumer i is the present value of future utilities
discounted at rate ρ. it allows addressing the trade-off between present and future
consumption
→ the intertemporal utility criterion brings into play the future availability of goods and
services (and resources more generally)
→ thus, it can be used to assess:
→ the desirability of structural reforms which imply trading off short term negative
effects with medium to long term positive ones (e.g. climate change)
→ the
cost of policies that fail to keep the economy at long term balance
→ many reforms have negative short-term effects (governments don’t like to adopt them)
→ the
intertemporal decision criterion should be the present value of the net benefits from the
reform. thus, if v(t) is the net increase in utility in period t of a reform carried out in period 0,
a criterion for undertaking this reform is:

, where e is the expectation operator and ρ is the discount rate

→ from the decision criterion principle, it must be noted that much depends on the choice of
the discount rate ρ:
→ high discount rate increases short term and immediate consumption
→ low discount rate gives more value to the welfare of future generations
→ the utility functions seen so far refer to only one individual or household, assumed to be
representative
→ problem: how do we aggregate the utilities of heterogeneous individuals?
→ must the utility of all agents be equally weighted? can the wellbeing of some be reduced
to increase that of others?

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 → these questions have a long history in normative economics and welfare economics
→ how to compare preferences of different individuals in the society? the choice then
requires a social welfare function which allows aggregating individual preferences

, where 1…m represent the individuals or households

→ this makes it possible to compare two utility distributions and to decide which one is more
desirable

→ consider individuals 1 and 2 with utilities u1 and u2 on x and y axes. → now suppose that the
af locus gives all possible combinations of their respective utilities
→ according to pareto criterion
→ c is superior to any situation on ac
→ e is superior to any situation on ef
→ there is nothing we can say about the points located on ec

→ there are different social welfare functions, the most usual social welfare functions are:

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 → benthamian (utilitarian) function: 𝛤 = 𝑈1 + 𝑈2 + + 𝑈𝑚. assumes that the
distribution of utilities across individuals has no importance and only the aggregate utility
matters

→ this means that the best point in the right picture is d because
the marginal utilities of individuals are equal and thus the
maximum aggregate utility is reached
→ notice that at this point the corresponding distribution of utility across individuals is
uneven

→
rawlsian function: 𝛤 = 𝑀𝑖𝑛 (𝑈1, 𝑈2, … , 𝑈𝑚). maximises the utility of the poorest
(maximin)

→ the maximin principle leads to choosing point c where utility of the least favoured
individual is maximum

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 → note that strict equality implies choosing point
b, which is
not pareto optimum. why?
→ should simultaneous increases in the utility of both individuals be rejected only because
they would not be equally distributed?

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