Positive Analysis against Normative Analysis

The microeconomics addresses both positive issues as policy issues. The positive issues have to do with explanation and prediction and normative issues with what should be. Let us suppose that the government of our country establishes a quota on imports of foreign automobiles. What happens to the price of cars and their production and sales?

How does this measure affect consumers in our country? Already the workers of the automobile industry? These issues all belong to the realm of analysis positive. This is fundamental in microeconomics. As we have explained before, theories are developed to explain phenomena, they are contrasted by means of observations and they are used to elaborate models from which predictions are made.

The use of economic theory to make predictions is important both for the managers of companies and for economic policy. Suppose the government is considering raising the gas tax. This would affect its price, the preferences of consumers regarding the size of the cars, their degree of use, etc. To make a reasonable planning, oil companies, car companies, producers of parts for cars and the companies of the tourist sector would want to know all of them what will be the order of magnitude of these different effects of the tax. Those responsible for economic policy would also need to have quantitative estimates of the effects of the tax. They would like to find out what costs it would impose on consumers (perhaps broken down by income classes); its impact on the benefits and employment of the oil, automobile and tourism sectors; and the amount of tax revenue that would probably be collected every year.

Sometimes we want to go beyond the explanation and the prediction and ask ourselves what is better, which requires an analysis normative, which is also important both for managers of companies and for those who conceive new economic measures. Consider, once again, the case of a new gas tax. Car companies would like to find out what is the best combination (profit maximize) of large and small cars that must be produced once the tax comes into effect or how much money they must invest in order for cars to consume less gasoline.

For those responsible for economic policy, the primary question will probably be whether this tax is in the public interest. The same objective of economic policy (for example, an increase in tax revenues and a decrease in our dependence on imported oil) could be achieved in a cheaper way with another type of tax, for example, with a tariff on imported oil.

The a regulatory analysis not only refers to the various options of economic policy; it also implies the conception of concrete options. Suppose, for example, that you have reached the conclusion that it is appropriate to establish a tax on gasoline. Weighing the costs and benefits, one must then ask what the optimal magnitude of the tax is.

The normative analysis it is often complemented by value judgments. For example, the comparison of the gas tax with a tariff on oil imports could lead to the conclusion that the tax is easier to administer, but it has more repercussions on lower income consumers. At that point, society should make an assessment and weigh equity and economic efficiency. When there are value judgments, microeconomics cannot tell us what the best policy is. However, it can clarify the dilemmas and help clarify and focus the debate.

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