Maximization of Social Welfare
Table of Contents
MAXIMIZATION OF SOCIAL WELFARE
WELFARE:
“Work done for the benefit of human beings” _ (LoF)
The measuring rod of welfare is money but nowadays the measuring rod of welfare in European Countries is energy ie the country using more energy is more advanced or rich country.
INDIVIDUAL WELFARE:
When we study the particulars of individual person ie a person has 50,000 salaries, it is individual welfare; or work which can be done individually and the benefit goes to the individual. Or “Individual welfare is the sum total of satisfaction derived by an individual from the consumption of economic goods.” _ (LoF)
SOCIAL WELFARE:
When we study the whole country or work which can be done in a society or community and the benefit goes to every person involved in this community/ society, or satisfaction derived by all the individuals in the society/ community.
- Just as indifference curves (Ic), the social welfare curves (Sw) gives in every point of curve equal satisfaction to the consumer of using the x or y commodities.
- Higher the Sw curves, more will be satisfaction and more use of x and y commodities.
- The individual can be linked with his choice. We can’t say that social welfare depends on society’s choice. The society consists of millions of individual which have different choices.
- If in a society, an economic measure or policy makes some individuals better off and others worst off, we can’t say what has happened to social welfare, it has gone up or down.
- The difficulty also arises from the immeasurability of utility or satisfaction.
- According to Marshal, it is impossible to measure the Social welfare by adding the individual utilities, but the utility is not an extensive magnitude like length and is not, therefore, measurable numerically. It is, on the other hand, an intensive magnitude and we say that social welfare as more or less.
- To measure social welfare from the economic welfare of an individual, there is a pre of inter-personal comparison.
- All are agreed that a rich man enjoys a greater no of economic welfare than a poor man (we compare poor man to rich man called inter-personal comparison). But for social welfare, it may, on the other hand, be considered an intra-personal comparison (in which the same person compares the two situations). He can say if he becomes rich he would derive greater satisfaction
Following two analysis are considered mostly:
Pigou’s Analysis:
- Pigou’s holds the view that interpersonal utility comparison is possible to measure the social welfare.
- According to him we well measure social welfare if some money (real income) is transferred from the rich to the poor. Such transfer will mean less loss of utility to the rich, than the gain of the poor.
- The above fig shows that there are two individual with different extreme income; the rich man can easily settle at H beyond which utility is –ve and the poor man at A because of low income.
- If the rich man’s income is reduced from H to E and this income is transferred to the poor man who enables him to move from A to D.
- On this assumption, the redistribution of income from the very rich to the very poor help in measuring social welfare. But such a redistribution of wealth will effect against the capital formation and will reduce social welfare by damaging the productive capacity of the community.
Paret’s Welfare Criterion:
- It is defined as, “situation in which everyone is so well off without making anybody worse off.”
- Italian economist V. Pareto has laid down the condition for maximum social welfare or for achieving a social optimum.
- According to him, “any change which harms no one and makes some people better off”.
- The fig shows that in a commodity, there is a person, which is added to x and y and their utility is x’s utility and y’s utility.
- The Parets’s criterion states that if we start from a situation A ie at point A both person x and y utility are same, but if we move to point B, the x’s utility increase but no change in y’s utility.
- It means that no harm occurs to y due to x. Similarly, if moves from A to C show that no any change in x-utility but increase in y’s utility and at point D benefit to both persons.
WELFARE ECONOMICS:
- “That branch of economics which is primarily concerned with the promotion of the welfare of the society or community in measuring of the satisfaction and the rights from the consumption of economic goods and services at the disposal of society/ communities.” _ (LoF) or; that branch of economic analysis which is concerned primarily with the establishment of criteria that can provide a positive basis for adopting policies which are likely to maximize social welfare.
- According to the above definitions, we can say that the principal function of welfare economics is to provide standards of judgments by which one can judge economic policies and events, from the point of view of social welfare.
- According to Scitovslly, “Welfare economics is that part of the general body of economic theory which is considered primarily with policy.”
- According to A.C. Pigous, “the economics welfare studies that part of social welfare that can be brought directly or indirectly into relation with measuring rod of money.”
Eco goods = those goods for which some money is paid.
Free goods = those goods for which no money is paid like oxygen, sunlight, etc.
POSITIVE ECONOMICS AND WELFARE ECONOMICS:
- Positive economics explains an economic phenomenon and normative or welfare economic comments on the desirability or otherwise of that phenomenon eg positive economics would explain why the prices of wheat have risen so high while welfare economics would suggest price control measure to promote the greatest good of the greatest numbers.
- Positive economics formulates economics generalization or law, whereas welfare economics is concerned with economic policies.
Private Goods:
The goods from which people take benefit and enjoy it and no other person interferes in it ie family house is used only by that particular family, not by others.
Public Goods:
Those goods, that everyone in a society takes benefits from it and enjoys it ie landscaping, recreation, etc.
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