An Introduction To Welfare Economics

What Is Welfare Economics?

The study of most favorable distribution of goods and resources and how it affects the social well being is known as welfare economics. This stream’s main focus is on analyzing the achievement of welfare and its distribution. The key factor here is the income and welfare economics is by far directly or indirectly related to income distribution and its effects on social well being. In nature, this branch of economics is subjective as models are created to measure improvement benefits to individuals on personal scale by assigning units of welfare. It defines the quality of the standard of living of people in a country and their prosperity. This is done depending upon various factors such as gross domestic product and income which accounts for the number of teachers and doctors, and reflects on their welfare.

Approaches In Welfare Economics

The early Neo-classical approach and the New Welfare Economics are the two conventional approaches to welfare economics. First we discuss the Neo-classical approach. Marshall, Pigou, Edgeworth and Sidgwick are the researchers who developed this approach. The Neo-classical approach assumptions are: (a) Utility is fundamental. It can be measured by scale, observed and judged. (b) Preferences are coherently stable and specified. (c)There is diminishing marginal utility which means that increase in consumption does not have major impact on the value. (d) Utility functions of every individual are interpersonally equivalent (In Mathematical Physics this assumption was avoided by Edgeworth). Summing up all the individual utility functions, a social welfare function can be build based on these above assumptions. Pareto, Hicks and Kaldor’s works are the source of the new Welfare Economics. In this the efficiency and the distribution aspect of the discipline are clearly recognized and treated differently. Pareto Efficiency and the Kaldor-Hicks Compensation tests are used as criteria to assess the questions of efficiency and social welfare function specification covers the questions of income distribution.

Uses Of Welfare Economics

Welfare of individuals is based on normative evaluations in welfare economics. Welfare economics is very useful in order to such as (i) it helps to allocate the efficiency and optimality of utility depending upon the subject of interest (ii) Helps in understanding the conditions where efficient allocation is required (iii) finding out and target the conditions in which arrangement of markets will distribute efficiently (iv) gain knowledge of the failure of the market and for its correction whether government interference is required (v) knowing what product is required by the population and in what quantity it should be supplied by the government.

Overall welfare economics is used for the well being of the country and its population in order to increase its efficiency and standard of living as a whole.

Criticisms

Austrian School economists doubt the value of cardinal social welfare function the reason being the difficulty in summing up the utilities of various individuals in terms of marginal utility like the difference between the poor and the rich. They also question relevancy of Pareto Optimal Allocation in situation where framework of means and ends is undefined whereas it’s assumed to be defined in Neo-Classical theory. Welfare economics can possibly do without using the price indices which is not always the case. The most significant concern of all is that utility approach is limited compared to welfare economics.

Conclusion

We deduce that there are advantages and disadvantages of using welfare economics. However the aim of welfare economics is the well being of the country and its people. To some extent welfare economics does justify its theories in doing so.