Welfare Economics
Meaning of Welfare Economics:
Welfare economics in a
branch which is primarily concern with promotion of welfare of the community as
measured in the satisfaction derived from consumption of goods & service at
the disposal of the community.
Nature
and Scope of Welfare Economxics:
The
nature and the scope of welfare economics can be understood from the fall
facts.
1. Economic
& Non-economic Welfare: Welfare economics
is, no doubt is concerned with economic welfare. But it is also concerned with
non-economic welfare. So, welfare economics is concerned with economics &
non-economic welfare
2. Both
Positive as well as normative Study Explains:
Positive as well as normative study explains an economic Phenomenon &
Normative Economics:
Eg;
Positive economics explains why wealth in the community is unequally
distributed, but normative economic would also comment whether the unequal
distribution of wealth is desirable or not. The question of commenting of
desirability falls under the preview of economics welfare. That means, welfare
economics is a normative study. Further, positive economics formulates
economics generalizations and it is concerned with economic polices.
3. Individual
Welfare As Well As Social Welfare: Welfare economics
is concerned with the individual welfare as well as social welfare.
Individual
welfare is generally, defined as the sum total of satisfaction derived by an
individual from the consumption of economic goods of services and social
welfare is defined as an aggregate of the utilities or satisfactions of all
individual in the society.
Application of Welfare Economics
- Pricing:
It may be noted that the pricing policy & output policy of the public
sector undertaking must be such as to maximize the social welfare.
- Trade Policy
on International Trade: Weather there
should be free trade policy or policy of protection to maximize economic
welfare of the people
- Policy
regarding rationing of scope product to maximize social welfare.
- Policy
regarding Monopoly V/s Competition: It may
be noted that welfare economics is opposed to the monopoly & supports
competition for the maximization of social welfare.
- Taxation
Policy: It may be noted that direct
taxes such as Income Tax & Wealth Tax is better than indirect
taxations likes sales tax; excise duty for the maximization of social
welfare
- National
Income: It may be noted that welfare
economist are able to demonstrate the close relationship between income
& welfare of the community. They suggest that increase in National
Income and the redistribution of National Income on a basis favorable to
the poor will increase the welfare of the community.
- Socialist Ideology: Welfare
economics provides a strong support to socialist Ideology which is
intended to maximize social welfare.
Analyses
of Welfare Economics:
According to
Pigou’s “Economic welfare is that part of social welfare which can be directly
or indirectly measured by monetary rod. According to him economic welfare
implies the satisfaction or utility derived by an individual from the consumption
of exchangeable goods & services.
Pigou measured
economic welfare in terms of national income. He stated that, other things
being equal, an increase in the national income tends to improve the economic
welfare of the people in the society & vice versa. So, the problem of
economic welfare is nothing but the problem of raising real national Income.
For raising the real national income, production resources should be shifted,
from less profitable ventures to more profitable ventures. It is the pay to the
economic welfare of the society.
Criticism of Pigou’s Concept of Economic
Welfare:
Pigou’s concept of
economic welfare is criticized by Dr. Graaf on two grounds. First, money as a
measure of welfare is neither accurate non satisfactory, because the value of
money changes with variations in the price level. Secondly, economic welfare
does not depend on exchangeable goods and services, because it is not possible
to separate economic factors from non-economic factors so far as individual’s
state of mind is concerned.
Pareto’s Analysis of Welfare Economics:
Introduction:
Vilifredo Pareto,
an Italian economist, is said to be the founder of new welfare economist act an
objective test of social welfare, pareto’s analysis is called paretein optimum,
Pareto unanimity rule paretian criterion & social or general optimum.
Paretian Analysis:
Paretian have laid down the condition for maximizing
social welfare or for achieving social optimum
Conditions
of Paretian Optimum:
Paretein optinum is
based on certain conditions, the conditions of paretian optimum are as follows:
- There should
be optimum allocations of products: The
allocation of products is optimal. If it is such as to make it impossible
for any fairs of individual to exchange any.
- There must be
optinum degree of specialization i.e.,
The marginal rate of transformation
between any two goods must be the same for any pair of firms producing
both of them.
- There must be
optimum factor utilization i.e., there
must optinum relationship between the factor & the product. The
utilization of factor will be optimum. If the marginal rate of
transformation between any factor and any product is the same for any two
firms using the factor & producing the product.
- There must be
optimum allocation of factors of product among the various uses. So, that
the marginal production in each use is the same.
- There must be
optinum direction of production: Goods
must be produced in such condition that they not only conform to
consumer’s preferences.
- There must be
optinum allocation of factor unit’s time.
- There must be
inter-temporal allocation of assets i.e., every firm must bring about an
optimal allocation of factor inputs & product output over time.
Basic or Fundamental Theorems of Welfare Economics:
Introduction:
They are two basic
or fundamentals theorems of welfare economics; they are called the 1st
& 2nd fundamental theorems of welfare economics.
- First Fundamental Theorems of
Welfare Economics: The first
fundamental theorem states that the price system from a perfectly competitive
economy includes selfish, individuals, independently maximizing their
private well being, to bring the economy to a socially optimal state.
Its
states that the prices increase in response to excessive demand & fall in
responsive to excessive supply.
It
recommends the use of competitive mechanism, i.e., the use of free market for
optimizing the economic welfare of the people.
- Second fundamental therom of
welfare economic: It states that, when the initial
distribution of resources is very uneven and cannot contribute to
maximization the economic welfare of the people, an alterative mechanism
should be thought of this theorem suggests the following course of
actions.
a) Choose
and a outcome which is economically efficient & which will contribute to
maximization of economic welfare of the people.
b) Re-allocation
the initial allocation of resources & then, simply rely unpon the
competitive mechanism,
Thus
the second fundamental theorem of economic welfare tell that competitive
mechanism with distribution of wealth will contribute to more efficient outcome
& more welfare.
Assumptions:
These theorems are based on certain
assumption. They are:
a) The
perfectly competitive economy, refered to in – the 2 fundamental theorems
imples the following conditions:
a. Mobile
resources
b. Many
buyers & many sellers
c. Homogenous
goods
d. Perfect
information
e. Costless
entry & exit
b)
There is consumer sovereignty
c)
There are property right in each good
d)
If the initial allocation or
distribution is not proper, here is re-distribution of resources or wealth.
e)
The goods are consumption goods
f)
These two fundamental theorems apply
to individual dual markets, & not to the whole economy.
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