Why economist use cardinal utility theory?

Answer 1

In economics, cardinal utility is a theory of utility under which the utility (roughly, satisfaction) gained from a particular good or service can be measured and that the magnitude of the measurement is meaningful. Under cardinal utility theory, the util is a unit of measurement much like the metre or second. A util has a fixed size, making comparisons based on ratios of utils possible.

This sort of comparison is of great theoretical value in social planning and ethics. Under the framework of utilitarianism, actions (including production of goods and provision of services) are judged by their contributions to overall happiness. Cardinal utility provides a way of judging the "greatest good to the greatest number". An act that reduces one person's utility by 75 utils while increasing two others' by 50 utils each has increased overall utility by 25 utils and is thus a positive contribution; one that costs the first person 125 utils while giving the same 50 each to two other people has resulted in a net loss of 25 utils.

This ability to neatly compare utilities in theory runs into problems in practice. There are major difficulties in measuring utility, which is inherently subjective. Unlike with distance or time, one cannot simply use a ruler or stopwatch to measure satisfaction. It is not simple to definitively say whether a good is worth 50, 75, or 125 utils to a person, or even if it is worth the same number of utils to two different people. These problems have resulted in a shift in microeconomic theory towards ranked preferences or ordinal utility, in which a good with a higher utility is preferred to one with lower utility but the magnitude of the difference has no meaning.

Cardinal utility was popular with utilitarian economists in the 18th century. Their belief was that utility could be measured and therefore wealth redistributed to those with lower levels of utility. Some utilitarians believed that since utility has diminishing marginal returns, it could be shaven off the top of an individual and given to another individual who would find the utility more useful. Many modern utilitarians, however, argue that such social engineering is impractical and is itself likely to reduce total utility.

There remain economists who believe that utility can be measured. These measures are not perfect but can act as a proxy for the utility. Lancaster's characteristics approach to consumer demand illustrates this point.