Oh dear. Image from www.healthcommunities.com
Identifying the reason(s) why Government should act is crucial in deciding whether policymakers should get involved to solve a problem. In classic microeconomics, this is usually underpinned by one or more market failures, or equity arguments.
If public policymakers decide that there is a need for Government intervention, what next? How much intervention is necessary? Do they go in, all guns blazing, and try to eradicate whatever the problem is? Even if it were desirable, is it even practical? Imagine trying to completely eliminate pollution around the world – even if it were possible, the costs are likely to be astronomical. But for most problems, there will be an efficient level of intervention – a point where the cost of preventing a ‘unit’ of the problem just equals the extra benefits of doing so.
The example of pollution above is typically the one used in economics textbooks to explain the idea of an ‘efficient’ level of Government intervention. It’s not the only problem that this can be applied to, though. The same principles could be applied to social problems that lend themselves to economic analysis less easily – in this case, teenage pregnancy.
However, just because something exists, doesn’t mean that Government could or should have a role in changing it. In the spirit of practising what I preach; I will look at the rationale for Government intervention in the teenage pregnancy ‘problem’, before thinking about where an efficient level of intervention might lie.
Teenage pregnancy: should Government do anything about it at all?
Thinking about a ‘market’ for teenage pregnancy isn’t easy, but all the term ‘market failure’ really refers to is a situation where a socially optimal outcome is not being reached. For an outcome to be considered socially optimal, it cannot be possible to make anyone better off without making someone else worse off. There are several circumstances under which a socially optimal outcome may not be reached, described below.
|Potential market failures applicable to teenage pregnancy:|
|Imperfect information: not all young people will have full and accurate information to help them make optimal decisions about their future. They may lack accurate information about sex and relationships, or the contraception services that are available to them. They may feel that they would like to have a baby, but have based this decision on little or no information about what being a parent will be like. Also, they may lack information about their education and careers options and so may have made different decisions about their future if this information had been made available to them.
Search costs: If the information that young people need to make optimal decisions is available but difficult to find, then they will make decisions based on incomplete knowledge rather than obtaining all the information they need to make the best decision.
Public good properties (or quasi public goods): A public good is something that is non-rival (one person’s enjoyment doesn’t detract from another’s) and non-excludable (if a good or service is provided for one person, then it has to be provided for all). There is a lack of incentive for the private sector to provide unbiased advice and sex and relationships services; as charging young people for the service is often not practical and restricting access to the information is difficult.
Bounded rationality: even if young people had all the information they need to make an informed choice, they may lack the decision skills needed to make optimal decisions that are in their best interests.
Myopia: some young people heavily discount the future and favour choices that yield short-term satisfaction over those which may be in their long-term best interests.
Externalities: Young people base decisions on their preferences and the consequences that affect them directly. There may be wider social consequences that don’t factor into their decision making, so the outcome that is optimal for any one teenager might not be optimal for society as a whole. These externalities can be either positive or negative.
Merit or demerit goods: if any externalities associated with teenage pregnancy were positive, then in economic terms, this could be seen as a merit good: a good or service whose consumption is confers beneficial effects on society. In this case, teenage pregnancy could be lower than the socially optimal level. If the externalities were negative, then teenage pregnancy could be seen as a demerit good: where the consumption of which is believed to confer negative effects on society. In this case, teenage pregnancy could be higher than the socially optimal level.
At this point, I won’t go into further detail about which market failures may or may not apply in practice. Although it’s pretty certain that some of them do (judging by the millions of £s, $s, etc. that are spent on teenage pregnancy policies) and therefore, we can say that the problem warrants some interest from Government.
How much: where is the most economically ‘efficient’ level of intervention?
If one or more of these market failures apply and Government intervention is necessary, how much intervention is enough? Eradicating teenage pregnancy completely sounds over-the-top, as teenage motherhood doesn’t necessarily rob all young women of opportunities in life, love or work that they will never see again; and will be a good thing for some young people. It would also be very expensive. Similarly, the costs of teenage pregnancy will rise as the number of teenage pregnancies rise – if the number of teenage mothers rose to a very high level, this would inevitably include some women who would incur some economic costs in terms of lost opportunities. Somewhere between these two extremes will lie the goldilocks solution of an ‘efficient’ level of teenage pregnancy and – in theory at least – Government should intervene up until the point that this level is reached. No more, no less.
Before we go any further, let’s just make sure that we’re comfortable with this idea of efficiency. The suggestion that there exists an ‘efficient’ level of teenage pregnancy may seem absurd, but in a world where money is tight, it actually makes a lot of sense: it’s simply a statement about making the best use of scarce resources.
In theory, the efficient level of teenage pregnancy is reached when:
The marginal social benefit of prevention (MSBP) = the marginal social cost of prevention (MSCP).
The MSBP of teenage pregnancy is the benefit to society of an additional teenage pregnancy prevented. The MSCP is the cost to society of preventing an additional pregnancy. So, the efficient level of teenage pregnancy is reached when the benefit to society of preventing an additional teenage pregnancy equals the cost to society of doing so. As these are social costs and benefits, the efficient level of teenage pregnancy here is also the socially optimal level.
The marginal social benefits of prevention
The marginal social benefits of prevention can be broken down into the benefit to the young person themselves (the marginal private benefit of prevention, or MPBP) and the additional benefits that are not accrued by the young person (marginal external benefit of prevention or MEBP).
Marginal private benefit of prevention
When thinking about how teenage pregnancy prevention might benefit different groups of individuals, it is easiest to start by thinking about what might happen at the two extremes: very low levels of teenage pregnancy and very high levels of teenage pregnancy.
Statistically, young women from less privileged backgrounds and those with lower education levels are more likely to become teenage mothers (see Ermisch and Pevalin (2003) and Duncan et al. (2010)). So at low levels of teenage pregnancy, the population of teenage mothers will be mostly from this group. In the jargon, their opportunity cost of being a teenage mother is relatively low, as this is less likely to restrict their labour market opportunities compared to those with higher education levels from a more privileged background. So for those teenagers who get pregnant in this case and who choose to have the baby, the costs to them from not doing so (and thus the benefits of prevention) are likely to be very small. There could even be a net gain associated with becoming a parent. Where the individual level costs are zero, then the marginal social benefits of prevention are equal to the marginal external benefits of prevention (MEBP). This is because the individual’s life is essentially unaffected by becoming a mother as a teenager, so the social benefits amount to any benefits of prevention that wouldn’t accrue to the individual (such as healthcare cost savings).
As the teenage pregnancy level rises, more and more women from increasingly advantaged backgrounds will become pregnant. If they choose to have a baby, the marginal private benefit of prevention is likely to rise. This rise continues as the level of teenage pregnancy rises, up to a maximum point. After this, the marginal private benefit of prevention is likely to decrease again, as teenage mothers from the most advantaged backgrounds have access to the support they need to be able to cope with being a parent, whilst still maintain the same life path that they would have followed otherwise. So, this means that the benefit to an additional young person from not having their baby reduces as those from more privileged backgrounds become pregnant.
Marginal external benefit of prevention (MEBP)
To illustrate the point in this stylised example, I have put this at a constant rate. The majority of resources that pregnant teenagers are likely to use are available to all and the UK Government doesn’t differentiate between age of mother when setting policy on child level benefit (welfare) payments. Thus, it is difficult to see how each additional pregnancy prevented is likely to result in a greater external benefit than the last.
The marginal costs of prevention
The marginal costs of prevention (MCP) are likely to be lower at higher levels of teenage pregnancy, because it’s easier to reduce the number of pregnancies when there are lots of them. The opposite is true for very low levels, as Government will need to target hard to reach groups with a low opportunity cost of having a baby to achieve further reductions; which is usually difficult and expensive. Diagram 1, below (drawn in MS Visio, for those who are interested) illustrates where the socially optimum (efficient) level of teenage pregnancy lies.
So, where is the efficient level of teenage pregnancy? Consider point A in diagram 1. At teenage pregnancy level TP0 the MCP is above the MSBP of teenage pregnancy: the cost of preventing teenage pregnancy is more than the social benefits achieved by prevention. Therefore, it doesn’t make sense to reduce teenage pregnancy to TP0.
The efficient level of teenage pregnancy is at TP* in the diagram. At this point, the social cost of preventing a pregnancy is just equal to the benefit to society of the pregnancy being prevented. Reducing teenage pregnancy further would cost more than the value of the benefits gained from the prevention. Allowing the teenage pregnancy level to rise from TP* would not be sensible either, as the cost of preventing the additional pregnancies would be lower than the social benefits of prevention, so there would be a net benefit to society if they were prevented.
Now, this is a stylised example and the chart above could probably be drawn in a few different ways. For example, if there were some positive benefits associated with teenage pregnancy, the social benefit of prevention would be below the external benefit of prevention, because prevention takes away some of the mother’s benefits as well as the costs.
Some people might think that this is tantamount to suggesting that teenage pregnancies are only worth preventing in middle class teenagers – because the rich are rich enough to look after themselves and the poor will always be poor. This analysis isn’t about socioeconomic factors; and teenage pregnancy policy generally doesn’t tend to target one social group over another. Moreover, it’s about economic and labour market potential and how teenage pregnancy affects a person’s ability to fulfil that potential. It’s just that in aggregate, socioeconomic background, labour market outcomes and teenage pregnancy may be correlated. That’s a question of social mobility, which is very much beyond the scope of this article.
What is in scope however, is the principle that efficiency is king. In a world where there is simply not enough money to go around and Government debt is a real issue, it’s never been more important to ground social policy in sound economic principles.
Duncan, S. Edwards, R. and Alexander, C. (2010): Teenage Parenthood: What’s the Problem? The Tufnell Press, London.
Ermisch, J. and Pevalin, D. (2003): Who has a Child as a Teenager? ISER Working Paper 2003-30.
 The intuition here is that those from more advantaged backgrounds generally have higher attainment levels and are more likely to go onto higher education. Therefore they have to give up more to have a child as a teenager and decide not to continue on this life path.