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Welfare Economics: Social Welfare
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This clear and balanced introduction to welfare economics reflects the most recent advances in the field. Designed for third-year undergraduate and graduate courses, it offers an extensive treatment of both the theory of welfare economics and the techniques for applying that theory to real problems.The first part of the book presents a synthesis of the theory. Starting from the premise that the purpose of theory is to provide criteria for ordering alternative economic states, the authors analyse the relationship between individual and social orderings. They discuss the conditions of Pareto efficiency and optimality as well as the ways in which market economies may fail to achieve a Pareto optimal allocation of resources. They go on to evaluate the theory of social welfare functions, paying particular attention to recent developments.The second part of the book considers the principles of applied welfare economics. Developing the use of the compensating variation as their main tool, the authors discuss welfare change measurement in single-person and many-person economies.
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AEM 630: The first half of the course surveys the theory of welfare economics as a foundation for public policy analysis. Major issues addressed include the problem of social welfare measurement, the choice of welfare criteria, and the choice of market or nonmarket allocation. Basic concepts covered include measurement of welfare change, including the compensation principle, consumer and producer surplus, willingness-to-pay measures, externalities, and the general theory of second-best optima. The second half of the course focuses on public policy analysis as applied to domestic agricultural policy and international trade. The domestic policy component examines major U.S. farm commodity programs and related food and macroeconomic policies and analyzes their effects on producers, consumers, and other groups. The international trade component examines the structure of world agricultural trade, analytical concepts of trade policy analysis, and the principal trade policies employed by countries in international markets.
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The proponents of a "new" welfare economics (Hicks, Kaldor, Scitovsky) have distanced themselves from their predecessors (Marshall, Pigou, Lerner) by abandoning the idea of making social welfare judgments on the basis of interpersonal comparisons of utility. Their problem was then that in absence of any kind of interpersonal comparisons, the only principle on which to ground their judgments was the Pareto principle, according to which a situation is a global improvement if it is an improvement for every member of the concerned population (there are variants of this principle depending on how individual improvement is defined, in terms of preferences or some notion of well-being, and depending on whether it is a strict improvement for all members or some of them stay put). Since most changes due to public policy hurt some subgroups for the benefit of others, the Pareto principle remains generally silent. The need for a less restrictive criterion of evaluation has led Kaldor (1939) and Hicks (1939) to propose an extension of the Pareto principle through compensation tests. According to Kaldor's criterion, a situation is a global improvement if ex post the gainers could compensate the losers. For Hicks' criterion, the condition is that ex ante the losers could not compensate the gainers (a change from situation A to situation B is approved by Hicks' criterion if the change from B to A is not approved by Kaldor's criterion).
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A utilitarian welfare function (... called a 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.
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The first development is related to the application of theories of equality of opportunity, and involves the construction of mixed social welfare functions which combine utilitarianism and maximin. Suppose that there is a double partition of the population, such that one would like the social welfare function to display infinite inequality aversion within subgroups of the first partition, and zero inequality aversion within subgroups of the second partition. For instance, subgroups of the first partition consist of equally deserving individuals, for which one would like to obtain equality of outcomes, whereas subgroups of the second partition consist of individuals who have equal opportunities, so that inequalities among them do not matter. Van de gaer (1993) proposes to apply average utilitarianism within each subgroup of the second partition, and to apply the maximin criterion to the vector of average utilities obtained in this way. In other words, the average utilities measure the value of the opportunity sets offered to individuals, and one applies the maximin criterion to such values, in order to equalize the value of opportunity sets. Roemer (1998) proposes to apply the maximin criterion within each subgroup of the first partition, and then to apply average utilitarianism to vector of minimum utilities obtained in this way.
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States or nations that provide comprehensive social welfare programs are often identified as having a welfare state. In such countries, access to social welfare services is often considered a basic and inalienable right to those in need. In many cases these are considered natural rights, and indeed that position is borne out by the UN Convention on Social and Economic Rights and other treaty documents. Accordingly, many people refer to welfare within a context of social justice, making an analogy to rights of fair treatment or restraint in criminal justice.
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