Bailouts, Opportunity Cost and Utilitarian Ethics : A Law & Economics Analysis

This article applies the concepts of opportunity cost and utilitarian ethics to corporate bailouts. When one thinks about bailing out a failing or distressed industry it is also necessary to consider alternative uses for the funds. Opportunity cost analysis concludes that the funds used for bailouts could be better utilized elsewhere. Utilitarian analysis, the dominant methodology among economists, also concludes that funding bailouts cannot be justified. This article constructs a simple mathematical model that is based on utilitarian analysis and concludes that bailouts cannot be ethically justified on utilitarian grounds because the result is a negative-sum game. Possible avenues for future research are also identified and discussed briefly