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ModULE 1.1
Positive Versus Normative Economics

Economic analysis draws on a set of basic economic principles. How these principles
are applied depends on the purpose of the analysis. Economic analysis that is used
to answer questions about the way the economy works — questions that have definite
right and wrong answers — is known as positive economics. In contrast, economic analysis
that involves saying how the economy should work is known as normative economics.
Imagine you are an economic adviser to the governor of a state, and the governor is
considering an increase in the toll that drivers are charged when driving on state high-
ways. Below are three questions the governor might ask you.
1. How much revenue will the tolls yield next year without an increase?
2. How much higher would that revenue be if the toll were raised from $2.00 to $3.00?
3. Should the toll be raised, bearing in mind that a toll increase would lower the
volume of traffic and air pollution in the area but impose a financial hardship on
frequent commuters?

There is a notable difference between the first two questions and the third one. The
first two are questions about facts. Your forecast of next year’s toll revenue without
any increase will be proved right or wrong when the numbers actually come in. Your
estimate of the impact of a change in the toll is a little harder to check — the increase in
revenue depends on other factors besides the toll, and it may be hard to disentangle the
causes of any change in revenue. Still, in principle there is only one right answer.
But the question of whether or not tolls should be raised may not have a “right”
answer — two people who agree on the effects of a higher toll could still disagree about
whether raising the toll is a good idea. For example, someone who lives near the turn-
pike but doesn’t commute on it will care a lot about noise and air pollution but not so
much about commuting costs. A regular commuter who doesn’t live near the turnpike
will have the opposite priorities.
This example highlights a key distinction between the two roles of economic
analysis and presents another way to think about the distinction between positive and
normative analysis: positive economics is about description, and normative econom-
ics is about prescription. Positive economics occupies most of the time and effort of
economists.
Looking back at the three questions the governor might ask, it is worth noting a sub-
tle but important difference between questions 1 and 2. Question 1 asks for a simple pre-
diction about next year’s revenue — a forecast. Question 2 is a “what if” question, asking
how revenue would change if the toll were to increase. Economists are often called upon
to answer both types of questions. Economic models, which provide simplified represen-
tations of reality using, for example, graphs or equations,
are especially useful for answering “what if” questions.
The answers to such questions often serve as a guide
to policy, but they are still predictions, not prescriptions.
That is, they attempt to tell you what will happen if a pol-
icy is changed, but they don’t tell you whether or not that
result is good. Suppose that your economic model tells you
that the governor’s proposed increase in highway tolls will
likely raise property values in communities near the road
but will tax or inconvenience people who currently use the
turnpike to get to work. Does that information make this
proposed toll increase a good idea or a bad one? It depends
on whom you ask. As we’ve just seen, someone who is very
concerned with the communities near the road will support Mira/Alamy Stock Photo
the increase, but someone who is very concerned with the
welfare of drivers will feel differently. That’s a value judg-
ment — it’s not a question of positive economic analysis. Should the toll be raised?

Module 1.1 Scarcity and Choice 7
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