Shopping on line can be easy, simple and save you lots of money. It can also take a lot of your time, frustrate you, and result in unwanted purchases. Now the same can be said for regular high street shopping, but with the vast opportunity presented by the Internet it will pay you to spend a few minutes reading this and understanding how to better optimize your Welfare Economics shopping experience:
1. Compare - without doubt the biggest advantage that the Welfare Economics offers shoppers today is the ability to compare thousands of Welfare Economics at a time. This is a great thing, but not necessarily all the time! Too much can be daunting at times so take advantage of the great comparison sites and where possible let them do the hard work for you.
2. Research - if it has been said it will be on the internet. Ignorance is no longer a justifiable reason for buying the wrong thing. Take the time to research in detail everything that you could possible want to know about
3. Testimonials - don't know anybody that has bought a Welfare Economics? Wrong! If the Welfare Economics is good the internet will let you know. Use the Internet as a friend and get testimonials before you buy.
4. Questions - Got a question about Welfare Economics then search the Forums, FAQ's, Blogs etc. Don't be afraid to ask .....
5. Reputation - Never heard of the company selling Welfare Economics? Don't worry, no reason why you should know every company in the world, but you know someone that does! Use the internet to find out what people are saying about Welfare Economics and build up a picture of their reputation for sales, returns, customer service, delivery etc.
6. Returns - still worried that even after all of the above your Welfare Economics wont be what you want? Check out the returns policy. There is so much competition now that someone, somewhere is bound to offer the terms that you are comfortable with.
7. Feedback - happy with your Welfare Economics then let people know, after all you are depending on others people input in your buying decision, so why not give a little back.
8. Security - check for the yellow padlock on the Welfare Economics site before you buy, and the s after http:/ /i.e. https:// = a secure site
9. Contact - got a question about Welfare Economics, or want to leave a comment then check out the sites contact page. Reputable companies have them and respond.
10. Payment - ready to pay for your Welfare Economics, then use your credit card or PayPal! Be aware of companies that don't accept them, there may be genuine reasons but given the huge amount of choice you have when buying online there is no reason at all not to buy via credit card or PayPal.
Welfare economics is a branch of economics that uses
microeconomics techniques to simultaneously determine allocative efficiency within an economy and the income Distribution (economics) associated with it. It analyzes
social welfare, however Social welfare function, in terms of economic activities of the individuals that comprise the theoretical society considered. As such, individuals, with associated economic activities, are the methodological individualism for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units. Here, 'welfare' in its most general sense refers to
well-being.
Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in
Pareto efficiency terms from social state
A to social state
B if at least one person prefers
B and no one else opposes it. There is no requirement of a unique quantitative measure of the welfare improvement implied by this. Another aspect of welfare treats income/goods Distribution (economics), including
economic inequality, as a further dimension of welfare.I.M.D. Little,
A Critique of Welfare Economics (1950). There are many such proposed measures of welfare, including the
Theil index and those in
Amartya Sen On Economic Inequality, Annexe with James E. Foster (1997), Clarendon Press, Oxford, ISBN 0-19-828193-5.
Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be specified as the summation of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of "utils" or dollars, or measured ordinally in terms of Pareto efficiency. The cardinal method in "utils" is seldom used in pure theory today because of aggregation problems that make the meaning of the method doubtful, except on widely challenged underlying assumptions. In applied welfare economics, such as in
cost-benefit analysis, money-value estimates are often used, particularly where income-distribution effects are factored into the analysis or seem unlikely to undercut the analysis.
There are two sides to welfare economics: economic efficiency and income distribution. Economic efficiency is largely positive (social sciences) and deals with the "size of the pie". Income distribution is much more normative and deals with "dividing up the pie".
Two approaches
There are two approaches that can be taken to welfare economics: the early
Neoclassical approach and the
New welfare economics approach.
The early
Neoclassical economics approach was developed by
Francis Ysidro Edgeworth, Henry Sidgwick,
Alfred Marshall, and
Arthur Cecil Pigou. It assumes that:
- Utility is cardinal utility, that is, scale-measurable by observation or judgment.
- Preference is exogenously given and stable.
- Additional consumption provides smaller and smaller increases in utility (diminishing marginal utility).
- All individuals have interpersonally commensurable utility functions (an assumption that Edgeworth avoided in his Mathematical 'Psychics).
With these assumptions, it is possible to construct a social welfare function simply by summing all the individual utility functions.
The
New Welfare Economics approach is based on the work of Vilfredo Pareto, John Hicks, and
Nicholas Kaldor. It explicitly recognizes the differences between the efficiency part of the discipline and the distribution part and treats them differently. Questions of efficiency are assessed with criteria such as
Pareto efficiency and the Kaldor-Hicks compensation tests, while questions of income distribution are covered in social welfare function specification. Further, efficiency dispenses with cardinal measures of utility: ordinal utility, which merely ranks commodity bundles, such as represented by an indifference-curve map is adequate for this analysis.
Efficiency
Situations are considered to have
distributive efficiency when goods are distributed to the people who can gain the most utility from them.
Many economists use Pareto efficiency as their efficiency goal. According to this measure of social welfare, a situation is optimal only if no individuals can be made better off without making someone else worse off.
This ideal state of affairs can only come about if four criteria are met:
- The marginal rate of substitution in consumption are identical for all consumers. This occurs when no consumer can be made better off without making others worse off.
- The Production possibility frontier#The marginal rate of transformation in production is identical for all products. This occurs when it is impossible to increase the production of any good without reducing the production of other goods.
- The marginal resource cost is equal to the marginal revenue product for all production processes. This takes place when production theory basics#Total, average, and marginal product of a factor must be the same for all firms producing a good.
- The marginal rates of substitution in consumption are equal to the marginal rates of transformation in production, such as where production processes must match consumer wants.
There are a number of conditions that, most economists agree, may lead to inefficiency. They include:
To determine whether an activity is moving the economy towards Pareto efficiency, two compensation tests have been developed. Any change usually makes some people better off while making others worse off, so these tests ask what would happen if the winners were to compensate the losers. Using the
Kaldor criterion, an activity will contribute to Pareto optimality if the maximum amount the gainers are prepared to pay is greater than the minimum amount that the losers are prepared to accept. Under the
Hicks criterion, an activity will contribute to Pareto optimality if the maximum amount the losers are prepared to offer to the gainers in order to prevent the change is less than the minimum amount the gainers are prepared to accept as a bribe to forgo the change. The Hicks compensation test is from the losers' point of view, while the Kaldor compensation test is from the gainers' point of view. If both conditions are satisfied, both gainers and losers will agree that the proposed activity will move the economy toward Pareto optimality. This is referred to as
Kaldor-Hicks efficiency or the Scitovsky criterion.
See also: first welfare theorem
Income distribution
There are many combinations of consumer utility, production mixes, and factor input combinations consistent with efficiency. In fact, there are an infinity of consumer and production equilibria that yield Pareto optimal results. There are as many optima as there are points on the aggregate
production possibilities frontier. Hence, Pareto efficiency is a necessary, but not a sufficient condition for social welfare. Each Pareto optimum corresponds to a different income distribution in the economy. Some may involve great inequalities of income. So how do we decide which Pareto optimum is most desirable? This decision is made, either tacitly or overtly, when we specify the
social welfare function. This function embodies value judgements about interpersonal utility. The social welfare function is a way of mathematically stating the relative importance of the individuals that comprise society.
A utilitarian welfare function (also called a Jeremy Benthamite welfare function) sums the utility of each individual in order to obtain society's overall welfare. All people are treated the same, regardless of their initial level of utility. One extra unit of utility for a starving person is not seen to be of any greater value than an extra unit of utility for a millionaire. At the other extreme is the Max-Min function. According to the Max-Min criterion, welfare is maximized when the utility of those society members that have the least is the greatest. No economic activity will increase social welfare unless it improves the position of the society member that is the worst off. Most economists specify social welfare functions that are intermediate between these two extremes.
The social welfare function is typically translated into social indifference curves so that they can be used in the same graphic space as the other functions that they interact with. A utilitarian social indifference curve is linear and downward sloping to the right. The Max-Min social indifference curve takes the shape of two straight lines joined so as they form a 90 degree angle. A social indifference curve drawn from an intermediate social welfare function is a curve that slopes downward to the right.
The intermediate form of social indifference curve can be interpreted as showing that as inequality increases, a larger improvement in the utility of relatively rich individuals is needed to compensate for the loss in utility of relatively poor individuals.
A crude social welfare function can be constructed by measuring the subjective dollar value of goods and services distributed to participants in the economy (
see also consumer surplus).
A simplified seven equation model
The basic welfare economics problem is to find the theoretical maximum of a social welfare function, subject to various constraints such as the state of technology in production, available natural resources, national infrastructure, and behavioural constraints such as consumer utility maximization and producer profit maximization. In the simplest possible economy this can be done by simultaneously solving seven equations. This simple economy would have only two consumers (consumer 1 and consumer 2), only two products (product X and product Y), and only two factors of production going into these products (labour (L) and capital (K)). The model can be stated as:
maximize social welfare: W=f(U1 U2) subject to the following set of constraints:
:K = Kx + Ky (The amount of capital used in the production of goods X and Y)
:L = Lx + Ly (The amount of labour used in the production of goods X and Y)
:X = X(Kx Lx) (The production function for product X)
:Y = Y(Ky Ly) (The production function for product Y)
:U1 = U1(X1 Y1) (The preferences of consumer 1)
:U2 = U2(X2 Y2) (The preferences of consumer 2)
The solution to this problem yields a Pareto optimum. In a more realistic example of millions of consumers, millions of products, and several factors of production, the math gets more complicated.
Also, finding a solution to an abstract function does not directly yield a policy recommendation! In other words, solving an equation does not solve social problems. However, a model like the one above can be viewed as an argument that solving a social problem (like achieving a Pareto-optimal distribution of wealth) is at least theoretically possible.
Efficiency between production and consumption
The relation between production and consumption in a simple seven equation model (2x2x2 model) can be shown graphically. In the diagram below, the aggregate
production possibility frontier, labeled PQ shows all the points of efficiency in the production of goods X and Y. If the economy produces the mix of good X and Y shown at point A, then the marginal rate of transformation (MRT), X for Y, is equal to 2.
Point A defines the boundaries of an Edgeworth box diagram of consumption. That is, the same mix of products that are produced at point A, can be consumed by the two consumers in this simple economy. The consumers' relative preferences are shown by the indifference curves inside the Edgeworth box. At point B the marginal rate of substitution (MRS) is equal to 2, while at point C the marginal rate of substitution is equal to 3. Only at point B is consumption in balance with production (MRS=MRT). The curve 0BCA (often called the
contract curve) inside the Edgeworth box defines the locus of points of efficiency in consumption (MRS1=MRS ²). As we move along the curve, we are changing the mix of goods X and Y that individuals 1 and 2 choose to consume. The utility data associated with each point on this curve can be used to create utility functions.
Social welfare maximization
Utility functions can be derived from the points on a contract curve. Numerous utility functions can be derived, one for each point on the production possibility frontier (PQ in the diagram above). A social utility frontier (also called a grand utility frontier) can be obtained from the outer envelope of all these utility functions. Each point on a social utility frontier represents an efficient allocation of an economy's resources; that is, it is a Pareto optimum in factor allocation, in production, in consumption, and in the interaction of production and consumption (supply and demand). In the diagram below, the curve MN is a social utility frontier. Point D corresponds with point B from the earlier diagram. Point D is on the social utility frontier because the marginal rate of substitution at point B is equal to the marginal rate of transformation at point A. Point E corresponds with point C in the previous diagram, and lies inside the social utility frontier (indicating inefficiency) because the MRS at point C is not equal to the MRT at point A.
Although all the points on the grand social utility frontier are Pareto efficient, only one point identifies where social welfare is maximized. This is point Z (sometimes called the bliss point) where the social utility frontier MN is tangent to the highest possible social indifference curve labelled SI.
Welfare economics in relation to other subjects
Welfare economics uses many of the same techniques as microeconomics and can be seen as intermediate or advanced microeconomic theory. Its results are applicable to macroeconomics issues so welfare economics is somewhat of a bridge between the two branches of economics.
Cost-benefit analysis is a specific application of welfare economics techniques, but excludes the income distribution aspects.
Political science also looks into the issue of
social welfare (political science), but in a less quantitative manner.
Human development theory explores these issues also, and considers them fundamental to the development process itself.
Paretian Welfare Economics
Paretian welfare economics rests on the assumed
Value theory judgment that, if a particular change in the economy leaves at least one individual better off and no individual worse off, social welfare may be said to have increased. (One individual being better off than other individuals and not leaving other individuals worse off is possible in societies, where political power is not related to economical power.) In this sense, an individualistic approach to social welfare is defined, with concern extending to all individuals in society, and with an explicit rejection of any ‘organic’ concept of the
StateChareles K. Rowley and Alan T. Peacock, Welfare Economics: A Liberal Restatement, York Studies in Economics, Martin Robertson, 1975 .
Criticisms
Many doubt whether a
Cardinal number utility function, or cardinal social welfare function, is of any value. The reason given is that it is difficult to aggregate the utilities of various people that have differing marginal utility of money, such as the wealthy and the poor.
Some even question the value of
Ordinal number utility functions. They have proposed other means of
measuring well-being as an alternative to price indices, "willingness to pay" functions, and other price oriented measures. These price based measures are seen as promoting
consumerism and
productivism by many. It should be noted that it is possible to do welfare economics without the use of prices, however this is not always done.
Value assumptions explicit in the social welfare function used and implicit in the efficiency criterion chosen make welfare economics a highly normative and subjective field. This can make it controversial.
See also
Sources
- Arrow, Kenneth J. (1951, 2nd ed., 1963). Social Choice and Individual Values, Yale University Press, New Haven.
- Anthony B. Atkinson (1975). The Economics of Inequality, Oxford University Press, London.
- Calsamiglia, Xavier, and Alan Kirman (1993). "A Unique Informationally Efficient and Decentralized Mechanism with Fair Outcomes," Econometrica, 61(5) , p p. 1147-1172.
- Chipman, John S., and James C. Moore (1978). "The New Welfare Economics 1939-1974," International Economic Review, 19(3), p p. 547-584.
- Feldman, Allan M. (1980). Welfare Economics and Social Choice Theory, Martinus Nijoff, Boston.* _____ (1987). "equity," The New Palgrave: A Dictionary of Economics, v. 2, pp. 183-84.
- _____ (1987). "welfare economics," The New Palgrave: A Dictionary of Economics, v. 4, pp. 889-95.
- Arnold Harberger (1971) "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, 9(3), p p. 785-797.
- Just, Richard et al. (2004), The Welfare Economics of Public Policy, Edward Elgar Publishing, Cheltenham and Northampton.
- Little, I.M.D. (1950; 2002). A Critique of Welfare Economics, Oxford. Preview. ISBN 0-19-828119-6.
- Yew-Kwang Ng (1979; rev. ed., 1983). Welfare economics. London: Macmillan.
- O'Connell, John F. (1982) Welfare Economic Theory, Auburn House Publishing, Boston.
- Samuelson, Paul A. (1947, Enlarged ed. 1983). "Welfare Economics," Foundations of Economic Analysis, Harvard University Press, Cambridge, MA, ch. VIII, pp. 203-53.
- _____ (1981). "Bergsonian Welfare Economics", in S. Rosefielde (ed.), Economic Welfare and the Economics of Soviet Socialism: Essays in Honor of Abram Bergson, Cambridge University Press, Cambridge, pp. 223-66.
- Amartya Sen (1963). "Distribution, Transitivity and Little's Welfare Criteria," Economic Journal, 73(292), p. 771-78.
- Suzumura, Kotaro (1980). "On Distributional Value Judgments and Piecemeal Welfare Criteria," Economica, 47(186), p p. 125-39.
References
Welfare economics is a branch of economics that uses microeconomics techniques to simultaneously determine allocative efficiency within an economy and the income
Distribution (economics) associated with it. It analyzes
social welfare, however Social welfare function, in terms of economic activities of the individuals that comprise the theoretical society considered. As such, individuals, with associated economic activities, are the methodological individualism for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units. Here, 'welfare' in its most general sense refers to
well-being.
Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in Pareto efficiency terms from social state
A to social state
B if at least one person prefers
B and no one else opposes it. There is no requirement of a unique quantitative measure of the welfare improvement implied by this. Another aspect of welfare treats income/goods Distribution (economics), including
economic inequality, as a further dimension of welfare.I.M.D. Little,
A Critique of Welfare Economics (1950). There are many such proposed measures of welfare, including the Theil index and those in
Amartya Sen On Economic Inequality, Annexe with James E. Foster (1997), Clarendon Press, Oxford, ISBN 0-19-828193-5.
Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be specified as the summation of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of "utils" or dollars, or measured ordinally in terms of Pareto efficiency. The cardinal method in "utils" is seldom used in pure theory today because of aggregation problems that make the meaning of the method doubtful, except on widely challenged underlying assumptions. In applied welfare economics, such as in cost-benefit analysis, money-value estimates are often used, particularly where income-distribution effects are factored into the analysis or seem unlikely to undercut the analysis.
There are two sides to welfare economics: economic efficiency and income distribution. Economic efficiency is largely
positive (social sciences) and deals with the "size of the pie". Income distribution is much more
normative and deals with "dividing up the pie".
Two approaches
There are two approaches that can be taken to welfare economics: the early
Neoclassical approach and the
New welfare economics approach.
The early
Neoclassical economics approach was developed by Francis Ysidro Edgeworth, Henry Sidgwick,
Alfred Marshall, and Arthur Cecil Pigou. It assumes that:
- Utility is cardinal utility, that is, scale-measurable by observation or judgment.
- Preference is exogenously given and stable.
- Additional consumption provides smaller and smaller increases in utility (diminishing marginal utility).
- All individuals have interpersonally commensurable utility functions (an assumption that Edgeworth avoided in his Mathematical 'Psychics).
With these assumptions, it is possible to construct a
social welfare function simply by summing all the individual utility functions.
The
New Welfare Economics approach is based on the work of Vilfredo Pareto, John Hicks, and
Nicholas Kaldor. It explicitly recognizes the differences between the efficiency part of the discipline and the distribution part and treats them differently. Questions of efficiency are assessed with criteria such as Pareto efficiency and the Kaldor-Hicks compensation tests, while questions of income distribution are covered in social welfare function specification. Further, efficiency dispenses with cardinal measures of utility:
ordinal utility, which merely ranks commodity bundles, such as represented by an indifference-curve map is adequate for this analysis.
Efficiency
Situations are considered to have distributive efficiency when goods are distributed to the people who can gain the most utility from them.
Many economists use Pareto efficiency as their efficiency goal. According to this measure of social welfare, a situation is optimal only if no individuals can be made better off without making someone else worse off.
This ideal state of affairs can only come about if four criteria are met:
- The marginal rate of substitution in consumption are identical for all consumers. This occurs when no consumer can be made better off without making others worse off.
- The Production possibility frontier#The marginal rate of transformation in production is identical for all products. This occurs when it is impossible to increase the production of any good without reducing the production of other goods.
- The marginal resource cost is equal to the marginal revenue product for all production processes. This takes place when production theory basics#Total, average, and marginal product of a factor must be the same for all firms producing a good.
- The marginal rates of substitution in consumption are equal to the marginal rates of transformation in production, such as where production processes must match consumer wants.
There are a number of conditions that, most economists agree, may lead to inefficiency. They include:
To determine whether an activity is moving the economy towards Pareto efficiency, two compensation tests have been developed. Any change usually makes some people better off while making others worse off, so these tests ask what would happen if the winners were to compensate the losers. Using the
Kaldor criterion, an activity will contribute to Pareto optimality if the maximum amount the gainers are prepared to pay is greater than the minimum amount that the losers are prepared to accept. Under the
Hicks criterion, an activity will contribute to Pareto optimality if the maximum amount the losers are prepared to offer to the gainers in order to prevent the change is less than the minimum amount the gainers are prepared to accept as a bribe to forgo the change. The Hicks compensation test is from the losers' point of view, while the Kaldor compensation test is from the gainers' point of view. If both conditions are satisfied, both gainers and losers will agree that the proposed activity will move the economy toward Pareto optimality. This is referred to as Kaldor-Hicks efficiency or the Scitovsky criterion.
See also: first welfare theorem
Income distribution
There are many combinations of consumer utility, production mixes, and factor input combinations consistent with efficiency. In fact, there are an infinity of consumer and production equilibria that yield Pareto optimal results. There are as many optima as there are points on the aggregate
production possibilities frontier. Hence, Pareto efficiency is a necessary, but not a sufficient condition for social welfare. Each Pareto optimum corresponds to a different income distribution in the economy. Some may involve great inequalities of income. So how do we decide which Pareto optimum is most desirable? This decision is made, either tacitly or overtly, when we specify the social welfare function. This function embodies value judgements about interpersonal utility. The social welfare function is a way of mathematically stating the relative importance of the individuals that comprise society.
A utilitarian welfare function (also called a Jeremy Benthamite welfare function) sums the utility of each individual in order to obtain society's overall welfare. All people are treated the same, regardless of their initial level of utility. One extra unit of utility for a starving person is not seen to be of any greater value than an extra unit of utility for a millionaire. At the other extreme is the Max-Min function. According to the Max-Min criterion, welfare is maximized when the utility of those society members that have the least is the greatest. No economic activity will increase social welfare unless it improves the position of the society member that is the worst off. Most economists specify social welfare functions that are intermediate between these two extremes.
The social welfare function is typically translated into social indifference curves so that they can be used in the same graphic space as the other functions that they interact with. A utilitarian social indifference curve is linear and downward sloping to the right. The Max-Min social indifference curve takes the shape of two straight lines joined so as they form a 90 degree angle. A social indifference curve drawn from an intermediate social welfare function is a curve that slopes downward to the right.
The intermediate form of social indifference curve can be interpreted as showing that as inequality increases, a larger improvement in the utility of relatively rich individuals is needed to compensate for the loss in utility of relatively poor individuals.
A crude social welfare function can be constructed by measuring the subjective dollar value of goods and services distributed to participants in the economy (
see also consumer surplus).
A simplified seven equation model
The basic welfare economics problem is to find the theoretical maximum of a social welfare function, subject to various constraints such as the state of technology in production, available natural resources, national infrastructure, and behavioural constraints such as consumer utility maximization and producer profit maximization. In the simplest possible economy this can be done by simultaneously solving seven equations. This simple economy would have only two consumers (consumer 1 and consumer 2), only two products (product X and product Y), and only two factors of production going into these products (labour (L) and capital (K)). The model can be stated as:
maximize social welfare: W=f(U1 U2) subject to the following set of constraints:
:K = Kx + Ky (The amount of capital used in the production of goods X and Y)
:L = Lx + Ly (The amount of labour used in the production of goods X and Y)
:X = X(Kx Lx) (The production function for product X)
:Y = Y(Ky Ly) (The production function for product Y)
:U1 = U1(X1 Y1) (The preferences of consumer 1)
:U2 = U2(X2 Y2) (The preferences of consumer 2)
The solution to this problem yields a Pareto optimum. In a more realistic example of millions of consumers, millions of products, and several factors of production, the math gets more complicated.
Also, finding a solution to an abstract function does not directly yield a policy recommendation! In other words, solving an equation does not solve social problems. However, a model like the one above can be viewed as an argument that solving a social problem (like achieving a Pareto-optimal distribution of wealth) is at least theoretically possible.
Efficiency between production and consumption
The relation between production and consumption in a simple seven equation model (2x2x2 model) can be shown graphically. In the diagram below, the aggregate
production possibility frontier, labeled PQ shows all the points of efficiency in the production of goods X and Y. If the economy produces the mix of good X and Y shown at point A, then the marginal rate of transformation (MRT), X for Y, is equal to 2.
Point A defines the boundaries of an
Edgeworth box diagram of consumption. That is, the same mix of products that are produced at point A, can be consumed by the two consumers in this simple economy. The consumers' relative preferences are shown by the indifference curves inside the Edgeworth box. At point B the marginal rate of substitution (MRS) is equal to 2, while at point C the marginal rate of substitution is equal to 3. Only at point B is consumption in balance with production (MRS=MRT). The curve 0BCA (often called the contract curve) inside the Edgeworth box defines the locus of points of efficiency in consumption (MRS1=MRS ²). As we move along the curve, we are changing the mix of goods X and Y that individuals 1 and 2 choose to consume. The utility data associated with each point on this curve can be used to create utility functions.
Social welfare maximization
Utility functions can be derived from the points on a contract curve. Numerous utility functions can be derived, one for each point on the production possibility frontier (PQ in the diagram above). A social utility frontier (also called a grand utility frontier) can be obtained from the outer envelope of all these utility functions. Each point on a social utility frontier represents an efficient allocation of an economy's resources; that is, it is a Pareto optimum in factor allocation, in production, in consumption, and in the interaction of production and consumption (supply and demand). In the diagram below, the curve MN is a social utility frontier. Point D corresponds with point B from the earlier diagram. Point D is on the social utility frontier because the marginal rate of substitution at point B is equal to the marginal rate of transformation at point A. Point E corresponds with point C in the previous diagram, and lies inside the social utility frontier (indicating inefficiency) because the MRS at point C is not equal to the MRT at point A.
Although all the points on the grand social utility frontier are Pareto efficient, only one point identifies where social welfare is maximized. This is point Z (sometimes called the bliss point) where the social utility frontier MN is tangent to the highest possible social indifference curve labelled SI.
Welfare economics in relation to other subjects
Welfare economics uses many of the same techniques as
microeconomics and can be seen as intermediate or advanced microeconomic theory. Its results are applicable to macroeconomics issues so welfare economics is somewhat of a bridge between the two branches of economics.
Cost-benefit analysis is a specific application of welfare economics techniques, but excludes the income distribution aspects.
Political science also looks into the issue of social welfare (political science), but in a less quantitative manner.
Human development theory explores these issues also, and considers them fundamental to the development process itself.
Paretian Welfare Economics
Paretian welfare economics rests on the assumed
Value theory judgment that, if a particular change in the
economy leaves at least one individual better off and no individual worse off, social welfare may be said to have increased. (One individual being better off than other individuals and not leaving other individuals worse off is possible in societies, where political power is not related to economical power.) In this sense, an individualistic approach to social welfare is defined, with concern extending to all individuals in society, and with an explicit rejection of any ‘organic’ concept of the
StateChareles K. Rowley and Alan T. Peacock, Welfare Economics: A Liberal Restatement, York Studies in Economics, Martin Robertson, 1975 .
Criticisms
Many doubt whether a Cardinal number utility function, or cardinal social welfare function, is of any value. The reason given is that it is difficult to aggregate the utilities of various people that have differing marginal utility of money, such as the wealthy and the poor.
Some even question the value of Ordinal number utility functions. They have proposed other means of measuring well-being as an alternative to price indices, "willingness to pay" functions, and other price oriented measures. These price based measures are seen as promoting
consumerism and productivism by many. It should be noted that it is possible to do welfare economics without the use of prices, however this is not always done.
Value assumptions explicit in the social welfare function used and implicit in the efficiency criterion chosen make welfare economics a highly normative and subjective field. This can make it controversial.
See also
Sources
- Arrow, Kenneth J. (1951, 2nd ed., 1963). Social Choice and Individual Values, Yale University Press, New Haven.
- Anthony B. Atkinson (1975). The Economics of Inequality, Oxford University Press, London.
- Calsamiglia, Xavier, and Alan Kirman (1993). "A Unique Informationally Efficient and Decentralized Mechanism with Fair Outcomes," Econometrica, 61(5) , p p. 1147-1172.
- Chipman, John S., and James C. Moore (1978). "The New Welfare Economics 1939-1974," International Economic Review, 19(3), p p. 547-584.
- Feldman, Allan M. (1980). Welfare Economics and Social Choice Theory, Martinus Nijoff, Boston.* _____ (1987). "equity," The New Palgrave: A Dictionary of Economics, v. 2, pp. 183-84.
- _____ (1987). "welfare economics," The New Palgrave: A Dictionary of Economics, v. 4, pp. 889-95.
- Arnold Harberger (1971) "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, 9(3), p p. 785-797.
- Just, Richard et al. (2004), The Welfare Economics of Public Policy, Edward Elgar Publishing, Cheltenham and Northampton.
- Little, I.M.D. (1950; 2002). A Critique of Welfare Economics, Oxford. Preview. ISBN 0-19-828119-6.
- Yew-Kwang Ng (1979; rev. ed., 1983). Welfare economics. London: Macmillan.
- O'Connell, John F. (1982) Welfare Economic Theory, Auburn House Publishing, Boston.
- Samuelson, Paul A. (1947, Enlarged ed. 1983). "Welfare Economics," Foundations of Economic Analysis, Harvard University Press, Cambridge, MA, ch. VIII, pp. 203-53.
- _____ (1981). "Bergsonian Welfare Economics", in S. Rosefielde (ed.), Economic Welfare and the Economics of Soviet Socialism: Essays in Honor of Abram Bergson, Cambridge University Press, Cambridge, pp. 223-66.
- Amartya Sen (1963). "Distribution, Transitivity and Little's Welfare Criteria," Economic Journal, 73(292), p. 771-78.
- Suzumura, Kotaro (1980). "On Distributional Value Judgments and Piecemeal Welfare Criteria," Economica, 47(186), p p. 125-39.
References
Welfare Economics
Welfare Economics. Topic 1. An introduction to welfare economics . Lecture slides, notes & topic handouts for this module are available from: http://www.staff.city.ac.uk/n.j.devlin
Welfare economics - Wikipedia, the free encyclopedia
Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine allocative efficiency within an economy and the income distribution ...
Welfare Economics and Public Choice
Welfare Economics and Public Choice Timothy Besley London School of Economics and Political Science April 2002 Welfare economics provides the basis for judging the achievements of ...
Welfare Economics
Welfare Economics. Topic 4. The first fundamental theorem of welfare economics . Lecture slides, notes & topic handouts for this module are available from:
TSO Online Bookshop - Welfare Economics
Online bookshop specialising in regulatory and official information. Offers a wide range of official publications, plus PRINCE2 Project Management, Pharmacopoeia, Building ...
Welfare Economics >> Palgrave.com : Title Page
Palgrave Macmillan is a global academic publisher, serving learning and scholarship in higher education and the professional world
e-Prints Soton - Welfare Economics and Giving for Development
The economics of welfare is at the heart of economics, but in recent decades welfare economics has been relegated to the sidelines. While economists routinely make policy ...
Economics And Welfare Of Extensive Sheep (EWES) - SAC (Scottish ...
Research: Economics And Welfare Of Extensive Sheep (EWES): Research in livestock and crops to help improve the sustainability of land-based industries.
Open Research Online - Symposium introduction: Life satisfaction and ...
The article provides an overview of a special issue on the economics of life satisfaction. ... Symposium introduction: Life satisfaction and welfare economics . Anand, Paul and ...
Welfare economics and public choice - LSE Research Online
Welfare economics and public choice. Besley, Timothy (2004) Welfare economics and public choice. In: The encyclopaedia of public choice. Kluwer Academic, Dordrecht
