SAN JOSÉ STATE UNIVERSITY
Suboptimization is a term that has been adopted for a common policy
mistake. It refers to the practice of focusing on one component of
a total and making changes intended to improve that one component and
ignoring the effects on the other components. The nature of the problem
is most easily understood from examples.
Examples of Suboptimization
- If a firm focuses on minimization cost, a desirable aim if all other
factors remain equal, and takes measures which not only reduce cost but
also reduce revenues even more the profit of the firm is adversely affected.
- A government agency that promotes a program for its benefits but ignores
its costs may make society worse off rather than better off. Maximization
of benefits without taking into account costs is not rational.
- An educational institution concerned about thefts of equipment might
take steps to minimize theft which result in students not being able to
use the equipment at all. This is clearly not optimal because it results
in the same effect as if all the equipment were stolen. The proper policy
has to consider the tradeoffs between security and access for legitimate use.
- Minimization of air pollution may be a valid goal if all other variables,
such as economic production, are held constant. But minimization of air
pollution without regard to what happens to production is not valid.
The proper goal is maximization of net social benefit which means that the
tradeoffs between air pollution and economic production must be taken into
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