ABSTRACT
The subject of this chapter—welfare economics—is an important facet of economic thought but it is rather difficult to define precisely. That is because, on the one hand, it addresses practical problems that generally fall under the category of “market failures,” that is, a failure to produce outcomes that maximize the general welfare, but, on the other hand, this analysis is not pursued as an explicitly philosophical enquiry. It is seemingly formal and “scientific” as the equilibrium models discussed in the previous chapter. In other words, welfare economists are typically more inclined to formulate alternative policy choices than to recommend specific courses of action. This ambivalence became more pronounced as the classical utilitarian approach proposed by Arthur Pigou was replaced by the “New Welfare Economics” and its focus on so-called Pareto efficiency which assumes that “interpersonal comparisons of utility” are to be avoided. Efficiency and equity then become the two horns of a dilemma. Pareto efficiency indeed is heavily biased towards the status quo. However, more recent “non-welfarist,” more or less explicitly pragmatic, trends have proposed a way out of this conundrum and are briefly discussed in the chapter.
