Welfare Economics

Welfare economics (JEL D6) evaluates the efficiency and equity of economic outcomes and the foundations of social choice.

Scope

It covers Pareto efficiency and the welfare theorems, social welfare functions, externalities, and the aggregation of preferences.

Sub-topics

• General
• Allocative Efficiency • Cost–Benefit Analysis
• Externalities
• Equity, Justice, Inequality, and Other Normative Criteria and Measurement
• Altruism • Philanthropy • Intergenerational Transfers
• Other

Core questions

• How should economic outcomes be evaluated?
• When is an allocation efficient?
• How can individual preferences be aggregated socially?
• How should efficiency and equity be traded off?

Key concepts

• Pareto efficiency
• Welfare theorems
• Social welfare function
• Arrow's impossibility theorem
• Externalities
• Equity-efficiency tradeoff

Key theories

Welfare economics and externalities

Pigou analysed efficiency and the correction of externalities.

Social choice

Arrow's impossibility theorem and Sen's work founded the theory of aggregating preferences into social choices.

History

Welfare economics developed from Pigou's analysis through the fundamental welfare theorems and Arrow's and Sen's social-choice theory.

Debates

Can social welfare be coherently defined?

Arrow's impossibility theorem shows the difficulty of aggregating preferences into a consistent social ordering.

Key figures

• Arthur Pigou
• Kenneth Arrow
• Amartya Sen

Seminal works

• pigou-1920
• arrow-1951
• sen-1970

Frequently asked questions

What is Arrow's impossibility theorem?

Arrow's result that no voting rule can aggregate individual preferences into a social ranking while satisfying a set of reasonable conditions.