ABSTRACT
If the subject of welfare economics were the study of the welfare actually experienced by members of society (which it is not) then whatever confidence is reposed by economists in the pricing system of competitive markets as an institution for the promotion of society's wellbeing is likely to be diminished once serious account is taken of the incidence of those spillovers that are often referred to as “interdependent welfare effects” or “ interdependent utility effects'. As this terminology suggests, the spillovers in question are the effects on some people's welfare of the welfare of other people, the latter being measured by their income, wealth, expenditure or status. Scepticism about the allocative virtues of competitive markets may be further provoked when non-environmental spillovers are extended to encompass the response of some people to the consumption of particular goods by others, to the particular activities of others, or to their group characteristics, whether ethnic or religious. For these preferences and prejudices which enter into the determination of a person's welfare do not, in general, register on market prices or outputs – except, perhaps, very indirectly. As a result, any movement toward an apparent overall optimal position for the economy (say that for which there is universal marginal cost pricing) may, in fact, be a movement away from a true optimum, even when there are no environmental spillovers.
