RH351

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RH351 Rhetoric of Economic Thought Transparencies
Set 8 Welfare economics and public policy
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Welfare economics, social choice theory, and
public policy
1800
1900
1700
2000
Borda (1733 1799)
Condorcet (1743 1794)
Bentham (1772 1823)
Dupuit(1804 1866)
Aristotle 384 322 B.C.
Mill (1806 1873)
Bentham
Edgeworth (1845 1926)
Pareto (1848 1923)
Pigou (1877 1959)
Pigou
Kautilya 350 293 B.C.
Buchanan (1919 )
Arrow (1921 )
Sen (1933 )
Sen
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On Ethics and Economics
Concerning questions about distribution all
these are questions of great interest and
difficulty, but no more form part of the Science
of Political Economy, in the sense in which we
use that term, than Navigation forms part of the
Science of Astronomy. Nassau Senior, 1790 1864
Economics is essentially a moral science. John
Maynard Keynes, 1883 1946
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On Ethics and Economics
it does not seem logically possible to
associate the two studies in any form but mere
juxtaposition. Economics deals with
ascertainable facts ethics with valuations and
obligations. The two fields of enquiry are not
on the same plane of discourse. Lionel Robbins,
1932
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Welfare economics and social choice theory
In the general case the demand function are
functions of m - 1 variables which are too
numerous to be represented in space. It seems,
therefore, that the problem when generalized can
only be formulated and solved algebraically

Leon Walras, Elements of Pure Economics (1874)
Political Economy does not have to take morality
into account. But one who extols some practical
measure ought to take into account not only the
economic consequences, but also the moral,
religious, political, etc., consequences

Vilfredo Pareto, Manual of Political Economy
(1906)
Vilfredo Pareto 1843 -- 1923
Leon Walras 1834 1910
Francis Edgeworth 1845 -- 1926
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Welfare economics and social choice theory
How do we evaluate alternative social
organizations? There are many possible
arrangements for meeting the needs of society and
they satisfy many different needs we use the
notion of efficiency or optimality that is
associated with the name of Vilfredo Pareto
Now, within this context, and under certain very
special assumptions efficiency can be achieved
through a particular kind of social system, the
price system.

Kenneth Arrow, The Limits of Organization (1974)
Kenneth Arrow 1921
Paul Samuelson 1915
Gerard Debreu 1921
Arthur Pigou 1877 -- 1959
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First and second fundamental theorems of
welfare economics
All market equilibria are Pareto
efficient. Every Pareto efficient allocation
can be achieved as a competitive equilibrium
(given an appropriate initial endowment and
convexity of preferences).
1. 2.
With such a definition it is almost self-evident
that this so-called maximum Pareto-optimality
obtains under free competition But this is not
to say that the result of production and exchange
will be satisfactory from a social point of view
or will, even approximately, produce the greatest
possible social advantage.
Knut Wicksell, On the Problem of Distribution
(1902)
Pareto optimality does not define, uniquely, a
best situation in any sense of the word Other
criteria roughly speaking, those we associate
with the term distributive justice have to be
called into play.
Kenneth Arrow, The Limits of Organization (1974)
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Welfare economics and social choice theory
economic theory owes its present development to
the fact that some men, in thinking of economic
phenomena, forcefully suspended all judgments of
theology, morality, and justice, and were
willing to consider the economy as nothing more
than an intricate mechanism, refraining for the
while from asking whether the mechanism worked
for good or evil. William Letwin, The Origins of
Scientific Economics (1963)
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The concept of consumer surplus
Jules Dupuit, "On the Measurement of the Utility
of Public Works", 1844
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The concept of surplus
P
14.00 13.00 12.00 11.00 10.00 9.00 8.00 7.
00 6.00 5.00 4.00 3.00 2.00 1.00 0
-- -- -- -- -- -- -- -- -- -- -- -- --
--
S
Consumer Surplus
Producer Surplus
D
Q , Q
600 --
100 --
200 --
300 --
400 --
500 --
700 --
800 --
900 --
d s
1000 --
1100 --
1200 --
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Economists to the right of them, Economists to
left of them, Economists in front of
them,Volley'd and thunder'd

• The Right Leaning Economist
• Sees externalities as an occasional market
  failure that calls for government intervention,
  but sees this as relatively rare exception to the
  general rule that markets lead to efficient
  allocations.
• Sees competition as a pervasive feature of the
  economy and market power as typically limited
  both in magnitude and duration.
• Sees large deadweight losses associated with
  taxation and, therefore, is worried about the
  growth of government as a share in the economy.
• Sees people as largely rational, doing the best
  the can given the constraints they face.
• Sees government as a terribly inefficient
  mechanism for allocating resources, subject to
  special-interest politics at best and rampant
  corruption at worst.

• The Left-Leaning Economist
• Sees externalities as a pervasive feature of
  modern economies.
• Sees large corporations with substantial degrees
  of monopoly power that need to be checked by
  active antitrust policy.
• Sees small elasticities of supply and demand (and
  therefore low rates of responsiveness to changes)
  and so is not too worried about distortionary
  effect of taxes.
• Sees people making systematic errors and believes
  that it is the governments role to protect
  people from their own mistakes.
• Sees government as the main institution that can
  counterbalance the effects of the
  all-too-powerful marketplace.

Adapted from Greg Mankiw