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Welfare Economics

  Welfare economics is the study of conditions in an economy that will maximize general economic well-being, that is, achieve all of those changes that will make one or many people better off without making anyone worse off. (It is not the study of public welfare systems in support of the poor.) More precisely, maximization of economic welfare occurs when two conditions are achieved: (1) no further change in the economy is possible that could make one person better off without an adverse effect on another person; (2) no further change is possible that can make one person better off and one worse off, but yet provide sufficient gain to the former to compensate the latter fully and still leave some gain to the former.

These two conditions in welfare economics are an attempt to avoid consideration of shifts of resources that would require a value judgment. A value judgment would hold that the condition of person x ought to be improved at the expense of y without full compensation to y. On the other hand, when an equilibrium is reached which conforms to these conditions, the economy is at what is known as a ‘Pareto optimum’.

The phrase ‘Pareto optimum’ was named after an Italian economist, Vilfredo Pareto (1848 - 1923), and is used to describe circumstances in which nobody can be made better off without making somebody else worse off. If an economy\'s resources are allocated inefficiently, a Pareto improvement ought to be possible: that is, making one person (or more) better off without harming anybody else. In practice, such uncontroversial opportunities are rare: change usually involves losers as well as winners, and the Pareto criterion has nothing to offer on how the balance should be judged. TF

See also game theory.



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