[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

People, consciously or not, think about the trade-offs at the margin in most of
their decisions. Economists, however, bring them into the foreground. Like opportunity
costs and sunk costs, marginal analysis is one of the critical concepts that
enable economists to think systematically about the costs of alternative choices.
This kind of marginal analysis has come to play an increasingly important role
in policy discussions. For instance, the key issue in various environmental regulations
and safety standards is not whether there should be such regulations, but
how tight they should be. Higher standards have both marginal benefits and
marginal costs. From an economic standpoint, justification of higher standards
hinges on whether the marginal benefits outweigh the marginal costs. Consider, for
instance, auto safety. For the past three decades, the government has taken an
active role in ensuring auto safety. It sets standards that all automobiles must
meet. For example, an automobile must be able to withstand a side collision of a
particular velocity. One of the most difficult problems the government faces
is deciding what those standards should be. It recently considered tightening
standards for withstanding side collisions on trucks. The government calculated
that the higher standards would result on average in 79 fewer deaths per year.
It calculated that meeting the higher standards would increase the cost of each
vehicle by $81. (In addition, the heavier trucks would use more fuel.) In deciding
whether to impose the higher standard, it used marginal analysis. It looked at the
additional lives saved and at the additional costs.
Wrap-Up
BASIC STEPS OF RATIONAL CHOICE
Identify the opportunity sets.
Define the trade-offs.
Calculate the costs correctly, ignoring sunk costs, taking into account opportunity
costs and marginal costs.
44 ∂ CHAPTER 2 THINKING LIKE AN ECONOMIST