Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 12

Although measuring utility directly may be impossible, economists have been quite willing to explore various approximations. Perhaps the most widely used measure is annual income. As the old joke goes, even if money can't buy happiness, it can buy you any kind of sadness you want. Still, economists remain interested in developing some more alternative measures of well-being, and this application looks at some of that research.
Income and Health
An individual's health is certainly one aspect of his or her utility, and the relationship between income and health has been intensively studied. Virtually all of these studies conclude that people who have higher incomes enjoy better health. For example, comparing men of equal ages, life expectancy is about seven years shorter for those with incomes in the bottom quarter of the population than for those in the top quarter. Similar differences show up in the prevalence of various diseases-rates of heart disease and cancer are much lower for those in the upper-income group. Clearly it appears that money can "buy" good health.
There is less agreement among economists about why more income "buys" good health.1 The standard explanation is that higher incomes allow people greater access to health care. But this hypothesis is contradicted by the fact that the connection between income and health persists in countries with extensive national health insurance systems. Such findings have led some economists to question the precise causality in the income-health linkage. Is it possible that the health is affecting income rather than vice versa? For example, health may affect the kinds or amount of work that a person can do. Similarly, large health-related expenses can prevent a person from accumulating both financial and human capital, thereby reducing income from such wealth. As in many economic situations, sorting out the precise relationship between income and health from the available data can be difficult.
Income and Happiness
A more general approach to the relationship between income and utility asks people to rank how happy they are on a numerical scale. Although people's answers show considerable variability, the data do show certain regularities. People with higher incomes report that they are happier than are those with lower incomes in virtually every survey. For example, the economic historian Richard Easterlin reports on measured happiness in the United States on a 4-point scale. He finds that people with incomes above $75,000 per year have an average happiness ranking of 2:8, whereas those with incomes below $20,000 per year have a ranking below 2:0.2 Surveys from other countries show much the same result. One peculiarity of the data on happiness is that people do not seem to get all that much happier as their own economic circumstances improve. Easterlin argues that this happens mainly because people's aspirations rise as they become richer.
Declining Happiness for Women
Much research on happiness has focused on the puzzling fact that the happiness of women seems to have declined in recent years despite the increased social and economic opportunities that have been opened to them. For example, Stevenson and Wolfers show that women's feelings of subjective well-being have declined significantly relative to those of men in a wide variety of surveys from both the United States and the European Union.3 These authors examine a number of possible reasons for the decline, but find that most proposed explanations are not supported by the data. One possibility they raise is similar to Easterlin's-as opportunities have opened for women in many different domains, their aspirations have also expanded. Hence, the welfare implications of the measured decline in subjective well-being are ambiguous.
A wide variety of indices of well-being are used in recent years to rank countries. These range from the Human Development Index (on which the United States ranks 4th) to the Happy Planet Index (on which the United States ranks 114th). Can you make any sense out of these vastly different rankings? Look up some of these on the Internet and develop your own opinion about which, if any, are reliable indicators of the well-being of the citizens of a country.