welfare economic as micro econmic criterian

1. WELFARE ECONOMICS
Submitted By:-
Sondarava Yagnesh
M.Sc (Agril. Extn)
04-2664-2015

2. 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.

3. 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

4. Pareto efficiency
• An allocation is Pareto-efficient for a given set
of consumer tastes, resources and technology,
if it is impossible to move to another
allocation which would make some people
better off and nobody worse off.

5. Perfect competition and Pareto efficiency
• If every market in the economy is a perfectly
competitive free market, the resulting
equilibrium throughout the economy will be
Pareto-efficient.
• As expressed in Adam Smith’s notion of the
Invisible Hand.

7. Distortions
• A distortion exists whenever society’s marginal
cost of producing a good does not equal society’s
marginal 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

8. 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

9. 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