ABSTRACT
After the introductory discussion of Social Welfare Functions in the previous chapter, this one turns to their maximization mechanisms: markets and plans. A recurrent theme of the previous discussion of GDP and other accounting conventions for aggregating individual welfare is the limited meaning of observed prices as the relevant information for social welfare accounting. As prices are, after all, ratios of quantities, or conversion factors, from where do these numbers arise? And can mechanisms that generate the right information for welfare analysis be identified? The role of this chapter is to argue that the traditional interpretation of the fundamental theorems, suggesting that market mechanisms provide the right prices in a welfare perspective, is not very helpful for an applied economist. It is argued that the concept of shadow prices, as different from that of observed prices, is the central notion of cost-benefit analysis. Thus, before introducing this subject explicitly in Chapter 3, it seems useful to avoid some misunderstandings about the roles of markets and governments as generators of information.
