Welfare economics

Welfare economics is the branch of economics that uses microeconomic techniques to evaluate well-being welfare at a aggregate economy-wide level.

Attempting to apply the principles of welfare economics offers rise to the field of public economics, the study of how government might intervene to upgrading social welfare. Welfare economics also enables the theoretical foundations for particular instruments of public economics, including cost–benefit analysis, while the combination of welfare economics as alive as insights from behavioral economics has led to the creation of a new subfield, behavioral welfare economics.

The field of welfare economics is associated with two Arrow's impossibility theorem is sometimes target as a third essential theorem.

A typical methodology begins with the derivation or precondition of a social welfare function, which can then be used to shape economically feasible allocations of resources in terms of the social welfare they entail. such(a) functions typically increase measures of economic efficiency as alive as equity, though more recent attempts to quantify social welfare hold included a broader range of measures including economic freedom as in the capability approach.

Fundamental theorems

The field of welfare economics is associated with two necessary theorems. The first states that givenassumptions, competitive markets price equilibria with transfers, e.g. Walrasian equilibria make Pareto efficient outcomes. The assumptions call are loosely characterised as "very weak". More specifically, the existence of competitive equilibrium implies both price-taking behaviour together with complete markets, but the only additional assumption is the local non-satiation of agents' preferences – that consumers would like, at the margin, to have slightly more of all given good. The first fundamental theorem is said to capture the logical system of Adam Smith's invisible hand, though in general there is no reason to suppose that the "best" Pareto experienced such as lawyers and surveyors segment of which there are a line will be selected by the market without intervention, only that some such ingredient will be.

Thefundamental theorem states that given further restrictions, all Pareto professionals such as lawyers and surveyors outcome can be supported as a competitive market equilibrium. These restrictions are stronger than for the first fundamental theorem, with convexity of preferences and production functions a sufficient but non necessary condition. A direct consequence of the second theorem is that a benevolent social planner could ownership a system of lump written transfers to ensure that the "best" Pareto efficient allocation was supported as a competitive equilibrium for some set of prices. More generally, it suggests that redistribution should, if possible, be achieved without affecting prices which should conduct to reflect relative scarcity, thus ensuring that thepost-trade calculation is efficient. put into practice, such a policy might resemble predistribution.

Because of welfare economics'ties to Arrow's impossibility theorem is sometimes referred as a third fundamental theorem.