Welfare Economics Definition Study Theory Examples

Welfare Economics Definition

It assesses the allocative or social efficiency, income distribution, and their influence on the people. It helps formulate policies to achieve social and economic benefits and arrive at a maximized state of overall satisfaction. The important welfare theories are Pareto Optimality, Kaldor-Hicks Compensation Criterion, Social Welfare Function of Bergson and Samuelsson, Scitovisky Criterion, and Amartya Sen’s Theory of Welfare.

Key Takeaways

Welfare economics meaning reflects its fundamental ideology that is the welfare of society: the health, happiness, and financial well-being of the whole people. Therefore, the growth measurement is not confined to GDP or real income but includes welfare factors.It signifies the importance of achieving the overall well-being of society.Prioritize policies to realize positive economic and social outcomes for society.Arthur Cecil Pigou and Alfred Marshal are the main contributors to this branch of economics.

Welfare Economics Explained

Welfare economics forms an important part of microeconomicsMicroeconomicsMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and supply.read more that analyses the impact of resource allocation and economic policies and actions on the well-being of people. It studies the structure of the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more and the markets in connection with the people and society. In essence, it focuses on how various economic scenarios contribute to social welfare and how the contribution varies.

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The fundamental of welfare economics theory is all about the efficiency of resource allocation and the corresponding well-being of society. It determines the economic policies for the collective growth and development of the community. Therefore, the efficient resource allocation and distribution of economic output are vital concepts of this domain. Furthermore, understanding the various aspects of the welfare system helps economists evaluate public financePublic FinancePublic finance is the management of the country’s public funds through revenue, expenditure, and reserves, and it generally includes the management of tax collection, expenditures, the annual national budget, deficits, and surpluses.read more, government policies, and welfare schemes.

Generally, academics describe the resource allocation process in connection with the invisible hand theory or the force of government intervention. For example, Keynesian economists always supported government intervention to stabilize the economy, whereas neoclassical economists favored the invisible hand concept. However, both occur in combination in the economy, structuring the resource allocation and distribution process.

Example

A simple welfare economics example will be when a country thinks better for its citizens and society. For example, a government can decide to spend its income for the betterment of society through building hospitals, parks, community centers opening new markets and welfare benefit schemes for unemployed people, child tax credits, and state plans for old age citizens instead of spending the same funds on non-welfare projects.

France is one of the leading countries committed to social welfare. Nowadays, every country is ensuring and still stuck in reviving their economy impacted by the COVID19 crisis, but France has always been committed to the welfare of people. In 2019, the pre-pandemic times, France had topped the list of social welfare spending calibrating its economy. The country spent more than 30% of its gross domestic productGross Domestic ProductGDP or Gross Domestic Product refers to the monetary measurement of the overall market value of the final output produced within a country over a period.read more on plans and welfare like a pension planPension PlanA pension plan is a retirement plan where the employer makes a guaranteed payment to the employee once they retire. Every month, the employee receives a specified income post-retirement derived from earnings on its employer’s investments.read more, healthcare, and unemployment benefits. The US came second to the list.

Importance of Welfare Economics

Some of the importance discerned from the interpretation of the concepts are the following:

It signifies the importance of optimal use of scarce resources to fulfill human needs.Favors the market structure nurturing maximum consumer surplusConsumer SurplusConsumer Surplus is the difference between the actual price that the customers pay for a product & the maximum price that they are ready to pay (for a single unit). You can calculate it by,
Consumer Surplus = Maximum Price to be paid willingly – Actual Paid Price
read more and producer surplus.It addresses the market distribution and structures and their effect on all classes of society.It ensures that the diverse problems are addressed and solved through resource allocation instead of allocating resources and finances to areas in dire need or can fix themselves.Throws insight into public finance, cost-benefit analysisCost-benefit AnalysisCost-benefit analysis is the technique used by the companies to arrive at a critical decision after working out the potential returns of a particular action and considering its overall costs. Some of these models include Net Present Value, Benefit-Cost Ratio etc.read more, and the impact of government policies. Prioritize policies and tools to guide the system to maintain the balance between society and its citizens. The policies should have the potential to realize positive economic and social outcomes for society.Economists formulate and guide policies to allocate funds and resources appropriately to the promising areas for society.It signifies the importance of government intervention and invisible market forces to stabilize the economy.

Criticism

Some of the significant criticisms of welfare economics are the following:

Many economists believe that the study of this theory is based on several assumptions.The criticism further denotes a lack of clarity in the study and cannot be adopted appropriately. Needs and values for goods vary between people. Hence the interpersonal utility comparison process is complex. The life of people changes; lifestyle changes result in changes in social needs and wants. Hence it is complex to capture the exact requirements and solutions. Means or methods to achieve the preferred ends is not perfectly known.Some opponents argue that increasing social expense for social development causes an economic crisis. Opponents of the theory believe that it is flawed because of ignoring the political determination of policies. One of the critical limitations of Pareto efficiencyPareto EfficiencyPareto Efficiency is a state of the economy in which economic resources are distributed or allocated in such a way that they are operating at their highest utility, and as a result, any additional effort made for reallocation will not provide a positive effect unless and until there is an equivalent negative effect.read more is often criticized in that it does not comment on equality of distribution.