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One of my bright students asked me a question that roughly goes like this: “What is the true definition of compulsory?”

What could he possibly mean by that? Isn’t it obvious? Perhaps not. Consider two strategies a government can use to deal with a situation where lots of customers want to use a resource, but there is not much of the resource to go around. Suppose this resource is train rides from Rochester to Manhattan on New Year’s Eve. One strategy is the market strategy of allowing the price to rise. If the price rises high enough, some passengers will choose not to take the train and instead celebrate the New Year from home in Rochester. A second strategy would be to do nothing about the money price but rather simply issue an edict forbidding anyone with a birthday is beyond February 19th from riding the train. If someone has a birthday beyond that date, and is caught riding the train, they would spend a night in jail when they returned home.

In each case, the “right” number of people would ride the train. My student asks a good question. In what sense is the second policy “compulsory?” Yes, there is a legal rule regarding who can ride, but in both cases, aren’t passengers “free” to choose to ride the train or not? In the first case, they decide to ride the train if the value they get exceeds the money cost of riding the train. The decision is the same in the second case. They decide to ride the train if the value they get exceeds the (smaller) money cost plus the expected costs from the possibility of getting caught and spending a night in jail. In either case they are “freely” choosing.

Without a philosophical argument, from the standpoint of economics, there is an easy way to distinguish between the two scenarios. I would argue the difference between the two is that the second situation is welfare reducing, while merely being “encouraged” not to do something because of a high price has no associated welfare loss. In other words, when the money price is high, and I choose to purchase a train ride – my monetary “loss” is someone else’s gain (it also provides long term incentives for someone to improve transportation services). When something is illegal and I choose to incur the high price (i.e. the possibility of punishment), when I actually pay that price, my “loss” is not a gain to anyone else. I simply spend a night in jail that I could have spent enjoying my home, or working, etc. Plus, there are lots of welfare losses from you trying to figure out ways around the legal restrictions to get on the train in the first place without detection. Such losses do not occur when you rely on a monetary price system.

So maybe you want to include in the definition of compulsory the idea that there is a welfare loss from disobeying the thing that is being compelled. Whether something is compulsory or not, it is correct that we can in a sense “voluntarily” choose it, but the ability to choose is not what makes something free or compulsory (remember, I am not making a moral or philosophical case here).

One Response to ““Compulsory” as an Economic Concept”

  1. Harry says:

    I had to read your piece four times before I understood; had to refer back to the first and second scenarios.

    You make a great case for a free market.

    Regarding a “true definition”, doesn’t that presume what follows, whoever answers, is true? Philosophical arguments aside, how can one avoid Aristotle?

    Your brilliant student was brave to ask such a question, especially after three decades of political correctness.

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