Normative Analysis Lecture

Recap of Positive Analysis

• Positive Analysis: Methodology to derive evidence about a subject, typically a policy.
  • Objective: To determine if a policy is good or not based on evidence.
  • Process: Gather and elaborate on evidence to explain policy impact on society, especially welfare.

Introduction to Normative Analysis

• Difference from Positive Analysis: Not focused on evidence but on argument and critical review.
• Purpose: To make judgments and provide recommendations about whether policies or situations can be improved.

Key Concepts

• Normative Statement: An argument about the desirability of policy outcomes or situations based on value judgment.
  • Example: "The price of milk should be stabilized with a minimum price level to give dairy farmers a higher living standard."
  • Requires critical review rather than empirical evidence.

Applications in Public Finance

• Focus: Whether the economy produces socially desirable results for enhancing welfare.
• Normative Analysis Goals: To judge and recommend actions to the government to meet objectives such as improved public welfare.

Keywords in Normative Statements

• Common indicators: Good, bad, just, unjust, fair, unfair, should.
  • Example: "The education budget should increase at the same rate as GDP."
  • Normative analysis involves critical thinking and judgment rather than scientific evidence.

Developing Normative Statements

• Requires a normative analysis: Critical review but not based on scientific techniques or empirical evidence.
• Importance of using suitable theories to support normative statements.
• Developing normative statements involves ensuring the statement is meaningful and realistic.

Conclusion

• Normative analysis is simpler than positive analysis but requires correct and suitable theory selection.
• Upcoming discussion: Selecting appropriate theories for normative analysis in public finance.