WELFARE ECONOMICS

Submitted By:-Sondarava YagneshM.Sc (Agril. Extn) 04-2664-2015

Welfare economics

• The branch of economics dealing with

normative issues.

• Its purpose is not to describe how the

economy works

• but to assess how well it works.

Equity and efficiency

• Horizontal equity

– the identical treatment of identical people

• Vertical equity

– the different treatment of different people in

order to reduce the consequences of their

innate differences

Pareto efficiency

• An allocation is Pareto-efficient for a given set

of consumer tastes, resources and technology,if it is impossible to move to anotherallocation which would make some peoplebetter off and nobody worse off.

Perfect competition and Pareto efficiency

• If every market in the economy is a perfectly

competitive free market, the resultingequilibrium throughout the economy will bePareto-efficient.

• As expressed in Adam Smith’s notion of the

Invisible Hand.

Distortions

• A distortion exists whenever society’s marginalcost of producing a good does not equal society’smarginal benefit from consuming that good.

– some such distortions may be inevitable

– and it may be more efficient to spread such

distortion over a wide range of markets, rather

than concentrating it in one market

– this results from the theory of the second-best

Market failure

• …occurs when equilibrium in free unregulated markets will fail to achieve an efficient allocation.

• Imperfect competition

• Social priorities (e.g. equity)

• Externalities

• Other missing markets

• – future goods, risk, information

Externalities

• externality arises whenever an individual’s

production or consumption decision directly

affects the production or consumption of others

…

• other than through market prices

– e.g. a chemical firm discharges waste into a lake & ruins the fishing for anglers