Levinson (2013) on Happiness and Policy

Arik Levinson, “Happiness, Behavioral Economics, and Public Policy.” NBER Working Paper No. 19329, August 2013.

• It is hard to know the costs imposed by an increase in noise pollution or by unemployment. Happiness data offer a relatively new way to judge those costs. 

• The notion is that you can examine average happiness in an area with high noise pollution, say, and, average happiness in a quiet area. If the quiet area is happier, we can ask, by how much would average income have to increase in the noisy area to bring about the same happiness level as in the quiet area (controlling for everything else, of course)? This methodology produces an estimate for the willingness-to-pay for a reduced noise environment. 

• The happiness approach to valuing a non-market public good like “quiet” has many pitfalls, but perhaps adaptation (or habituation, the hedonic treadmill) is foremost among them. People adapt pretty quickly to permanent situations, so that most bad events or conditions, in the long run, do not lower subjective well-being. Does this mean that these bad events impose no costs in the long run? (The analogous issue arises for good events or conditions.) 

• Temporary events, like particularly bad noise one day, should not influence evaluative measures of subjective well-being, but do affect momentary happiness, and hence should affect hedonic happiness measures. It turns out that, through projection bias, evaluative measures of long-term satisfaction actually are affected by minor, short-term events like a bad noise or weather day, or by finding a dime. 

• Analysts can be careful, but in the end, we still seem to have an insoluble problem, that policy makers should care most about long-term conditions, but because of adaptation, happiness only varies with short-term conditions.