As discussed in Chapter 1, one of the main arguments in favor of free market institutions is the creation of wealth, which is assumed to increase welfare. Welfare refers well-being, happiness or utility. The ethical theory that takes overall welfare as its standard is utilitarianism. In this chapter we first describe utilitarianism. Compared to the other ethical theories described in Part II and Part III of the book, utilitarianism is most aligned to economic thought. Both in utilitarianism and in economic welfare theory utility is the main criterion to evaluate a certain state of affairs.

After introducing utilitarianism, we describe cost–benefit analysis as a practical method to apply utilitarianism to concrete policies. Next, Section 3 deals with some philosophical problems of utilitarianism and cost–benefit analysis. Section 4 describes some responses to these problems.