Regulatory economics is responsible for proposing recommendations, policies and actions based on subjective personal judgments or on “what should be.” For this it is based on economic theory.
Normative economics identifies what objectives are desirable and then apply knowledge of the positive economy to achieve them. The choice of objectives depends on the ethical and political considerations of the economist, so it is usually considered that it is not a purely scientific economy.
From this approach, it is based on a given situation and a certain economic theory to recommend a course of action. In this sense, when judging the situation as unsatisfactory, normative economics introduces a value judgment, so it ceases to be completely objective. Thus, the recommendation that the normative economist will make will not only be based on objective cause-effect relationships, but also on his judgment about the desirability or not of certain situations. Other disciplines such as politics, ethics or even religion intervene in these value judgments.
There is a stream of thinkers and economists who believe that the economy will always be normative. This vision is based on the fact that any social reality is based on value judgments, so that its study cannot be objective and free from moral considerations. Ideas such as free trade, for example, depend on the concept of freedom. Therefore, any modification of the concept of freedom, which is an ethical-moral concept, will influence the definition of the economic concept itself.
Normative economics is distinguished from positive economics by the influence of value judgments and ethical considerations.
Example of normative economics
The normative economy starts from situations described by the positive economy and recommends economic policies based on some value judgment.
Thus, before the following statement purely descriptive:
“Salaries are higher in the city than in the countryside, so there is a migration from the countryside to the city.”
And applying the following value judgment:
“The depopulation of rural areas is not good.”
Regulatory economics will recommend the following policy:
” Salaries in rural areas should be subsidized to prevent the difference in salaries from taking people to the city.”
It is clearly seen how depending on the value judgment the recommended policy will be one or the other.