ABSTRACT
Understanding why and how a government should intervene in a market economy is a central concern of welfare economics. This chapter develops a framework for thinking about welfare, at both the individual and social level. It begins with the case of standard consumers and no redistributive or market failure concerns, for which there is consequently no motivation for government intervention. But if there is a gap between what individuals choose — according to decision utility — and what maximizes their well-being — as evaluated by experienced utility — then paternalistic policies can be justified. In this case, what form should the policies take? Traditional economic policies include taxes, subsidies, mandates, and bans. Another strategy is to use a nudge as a form of soft paternalism. The tradeoffs of nudges are discussed. The chapter concludes with applications to health and energy efficiency decisions.
