Welfare economics is a branch of economics that studies the policies that government should implement to increase the welfare of society as a whole. It is closely related to social choice theory, public choice theory, and policy studies. Welfare economics is concerned with the principles and the designs of economic systems, both public and private, that maximize social welfare, in accordance with economic efficiency and equity. Welfare economics focuses on the overall well-being of individuals in an economy, rather than on their economic production or income.
The origin of welfare economics can be traced back to British philosopher and economist Jeremy Bentham, who believed that public activities should be judged as a collective and produced the most benefit for the greatest number of people. In the early 19th century, the science of welfare economics emerged from utilitarian ethical theories of the day. The utilitarian idea holds that, in order to determine the desirable outcome of a policy, it is necessary to calculate the sum of the smallest pleasures caused by that policy and compare it to the sum of the largest pains created by it. From this idea, economists developed a definition for social welfare, which was the aggregate of all individual welfares, meaning that the collective well-being of the people determines the economic success of a nation.
Contemporary welfare economics was put forward by, among others, Pareto and Edgeworth, who both argued that the welfare of a society could be evaluated by measuring the outcomes of different economic strategies. Modern welfare economics is based on the Pareto criterion, which states that a policy should be considered beneficial if it leads to some members of society being better off without making others worse off. This criterion has been used to determine the economic efficiency of different economic policies, such as taxation, subsidies, and the formation of public goods.
Welfare economics can also be used to evaluate the distribution of resources within a society. This evaluation is based on the principle of equity, which states that the distribution of resources should be made in an equal or fair way. This principle can be applied to the allocation of scarce resources, such as food, housing, health services, and education. For example, policies that provide income payments to those in need may be considered efficient and equitable if their effect is to reduce poverty and inequality.
Welfare economics is a powerful tool for understanding the implications of different economic policies. By evaluating the impact of different policies on social welfare and the well-being of society, economists can make evidence-based policy recommendations. The field of welfare economics has been important in shaping both public and private policies in recent years and likely will remain so in the future.
