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Welfare Economics

Updated on April 22, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Welfare Economics Definition

Welfare economics is a branch of economics that studies the impact of factors like resource allocation and economic policies on human and social wellbeing. The study was introduced in the 20th century as an essential part of economic theory. Arthur Cecil Pigou, an English economist, is the father of welfare economics.

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.

Welfare Economics Meaning

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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.

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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:

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

Frequently Asked Questions (FAQs)

What is the objective of welfare economics?

The main objective is the overall welfare of society by studying the impact of different economic policies on society as a whole. The study estimates the strength and weaknesses of various economic policies and government initiatives using tools like cost-benefit analysis. It deals with different income levels and throws insight into many issues related to a community, region, or nation and its people. It also helps create and guide policies to solve significant problems effectively.

Who is the father of welfare economics?

Arthur Cecil Pigou, an English economist, is the father of welfare economics. Furthermore, his leader, Alfred Marshall, studied the in-depth assumptions, importance, and characteristics of welfare economics and postulated the welfare-based definition of economics. 

Why is welfare economics important?

It reflects the fundamental ideology of the welfare of society: the health, happiness, and financial well-being of the whole people. The growth measurement is not confined to GDP or real income but includes welfare factors.

This has been a guide to Welfare Economics and its definition. Here we discuss the meaning of welfare economics with example, theory, study & Pigou’s work. You can learn more from the following articles – 

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