Economics studies how a society uses those of its resources that have alternative uses. For instance, wood can be used for various purposes, primarily building and fuel. In a market economy, scarce resources typically go to the buyers that pay the highest prices for them. One approach that classical economists came up with for the allocation of a society’s resources is an aggregate utility approach.
Utility refers to the satisfaction or pleasure that a consumer gets by consuming a product. If you buy a car, you derive a certain utility from it. Each consumer is not likely to receive the same amount of utility from the consumption of a product, however, as everyone’s preferences are different.
Aggregate utility is the total utility that a society gains from making a certain economic choice. For instance, a society might have to set an age at which an individual could start to collect retirement benefits. Each choice is likely to benefit some individuals more, adding to their utility, while negatively impacting other individuals, reducing their utility or creating a disutility. The aggregate utility of a choice for a society, as a whole, is the sum of the utility gains for those positively impacted, less the total disutility experienced by those negatively impacted by the choice.
While aggregate utility quantifies how a population benefits from a choice, average utility -- the aggregate utility divided by the number of people within the population who are affected by the choice -- illustrates the impact of that choice on those actually impacted by it. Considering the allocation of wood products, for example, the average utility of using wood as fuel for cooking or heat is the aggregate utility divided by the number of people who use wood in that fashion. This is an especially valuable metric in developing societies, where natural gas or electricity are replacing wood as a primary fuel source.
Aggregate Utility and Social Satisfaction
Using an aggregate utility approach, some classical economists argued that in order to maximize social satisfaction, an equal distribution of wealth is the best way to do so. This is because the loss of utility to those who lose some wealth, through an equal distribution, is more than made up for by the gain in utility to those who get a share of a society’s wealth through equal distribution. However, economists have also argued that the likely loss of overall social production -- as people have less of an inclination to produce -- and other costs of government interference -- as a result of an equal distribution of wealth -- make this approach not so practical.
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