The most important norm in economics was set by economist Vilfredo Pareto about a century ago. Put simply, the Pareto Criterion says that anything making at least one person better off, while making nobody else worse off, is desirable.

Or in other words, if two consenting adults get together and do something, voluntarily, without hurting anybody else in the process, and if we think that adults are generally better judges of what is good for them than some distant bureaucrat, the rest of us should leave them alone.

It is a bit puzzling, then, that we wind up in situations where we could save lives and save money by being a bit friendlier toward voluntary transactions and by allowing compensation. I will return to this.

Voluntary interactions among consenting adults are often banned. Charging interest on loans was banned by the Church and states for centuries. Life insurance faced hurdles when first established in the early 1800s – people saw it as a gruesome way of betting on someone else’s death.

Prostitution was illegal in New Zealand until relatively recently, while remaining illegal in most of the US; sale and consumption of marijuana is illegal in New Zealand today while being legal in many American states. Which sorts of voluntary transactions among consenting adults are banned is more than a little arbitrary.

But one type of trade is banned in most of the developed world. It is legal to be a surgeon and be paid to perform organ transplants. It is legal to be an administrator overseeing the patients and to be paid to figure out which donor organs will best match with which potential transplant recipients.

It is legal to pay extra to stay in a nicer facility for post-operative recuperation after transplant surgery. In many places, it is legal to process donors’ bodies and to sell, for profit, materials then used in (for example) dental implants and bone grafts. It is legal to develop, market and sell new instruments to make transplants more efficient. But it is generally illegal to pay the donor’s estate for providing the donation, or to pay someone to give you a kidney if you need one.

Just as rent controls cause apartment shortages in many cities, bans on payment for organ donation result in organ shortages. Queues for organ transplants are long in most of the world – barring Iran, where donors are paid.

The organ donation system in New Zealand is much the same as that in most of the western world. People making whole-body donation for science receive some compensation: their remains are cremated before being returned to their families, a service otherwise costing about $1500. But you cannot be paid to sign your organ donor card. And like everywhere else, New Zealand has a big shortage of donor organs.

Compensation coercive?

In a partially liberalised market working within New Zealand’s public health system, the Ministry of Health could defray the reasonable funeral costs of organ donors. Doing so could encourage greater donation.

Some transplant ethicists worry that such compensation could be coercive but it is difficult to see how this kind of compensation regime would be any more coercive than any other financial transaction.

But even if everyone agreed to be an organ donor, cadaveric donation still would be unlikely to meet all the demand for organs. Most people do not die in circumstances allowing their organs easily to be used for transplant. In the very best case, a donor dies under controlled circumstances in an ICU bed with rapid organ harvest.

Although some kidneys are now being taken from donors who had experienced uncontrolled cardiac death, and while such donations are increasing, it can take longer for those grafts to begin functioning. Donations from live donors have become much more important in kidney transplant.

Live organ donors receive some minor compensation for their time. Work & Income provides payment during the donor’s recuperation, ranging from $140 to $350 a week depending on the donor’s age and marital status.

Average wages in New Zealand are just short of $1000 a week, so a donor who is off work loses, on average, $650-860 per week for a month or more. Not everyone can afford to take such losses.

Where people rely on friends and family for living donation, this privileges people with richer friends and family, who are able to afford to take the time off for recuperation. And, as each kidney transplant saves the Ministry of Health rather a bit of money, miserly compensation arrangements can prove exceptionally costly.

Elizabeth Prasad investigated the economics of organ donation in New Zealand as her honours thesis in economics under my supervision when I was at the University of Canterbury; she expanded it into a masters after I left.

The New Zealand Initiative this week released a research note drawing on Ms Prasad’s thesis, with a focus on the economics around compensation of live donors.

She finds that a kidney transplant for a middle-aged man saves the health system, over the longer term, about $125,000. Patients on dialysis have short life expectancies and have lower quality of life than transplant recipients. And each year of dialysis is very expensive.

Save lives, save money

While a transplant isn’t cheap, it’s a one-off cost with relatively low costs afterward. Transplantation quickly pays for itself, even if donors are compensated generously.

And so we have a situation where the Ministry of Health could improve and save lives, while saving money in the process.

National MP Chris Bishop’s member’s bill providing stronger compensation for organ donors’ lost wages then can do much good. But it could be strengthened further.

In Israel, live organ donors receive more than just compensation for lost wages. They also receive an assurance that, should they wind up needing a transplant in future, they would not be at the back of the queue. It simply would not be fair to send a live organ donor, who has already shortened the transplant queue by one place, to the back of the line should that donor ever need a transplant.

Prohibiting voluntary exchanges among consenting adults has rather predictable results. Small steps, like Work & Income’s providing stronger compensation for live donors’ lost wages, can do some good in mitigating the harms that otherwise occur when politics has banned markets.