Federal Reserve Bank of Boston

This issue

MANY ECONOMIC DECISIONS we make have an impact not only on ourselves, but also on the others around us. This issue explores several examples of the social effects of individual economic choices.

In Too Much of a Good Thing Can Be Bad, Carrie Conaway examines how patent law affects the market for pharmaceuticals. Because drugs are expensive to develop and easy to duplicate, drug companies need patents to protect their research investments. But too much patent protection can raise prices and stunt innovation, leaving companies and consumers worse off.

Likewise, electronic payment usage has been slowed because payment networks are more valuable, the more people and firms use them, according to Joanna Stavins in Perspective on Payments. No bank wants to invest in joining a network, only to find that none of its customers or competitors are participating. As a result, banks may adopt new payment technologies more slowly than is best from a system-wide point of view.

One justification for taxing “sinful” products such as tobacco or alcohol is that an individual’s decision to use them may cause injury to others, as Phineas Baxandall highlights in Taxing Habits. Raising the price of these goods should discourage their use and reduce these social harms. But, Baxandall notes, these taxes also raise revenues, leaving state governments to weigh the social benefits of reduced consumption against increased tax receipts when people indulge.

Finally, the current fiscal crisis for state governments leads E. Matthew Quigley to examine how states spend their money in Issues in Economics. Quigley points out that states face the same difficult choices as individuals–especially during tough economic times.

CATHY E. MINEHAN

PRESIDENT, FEDERAL RESERVE BANK OF BOSTON

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