Review of Welfare Economics

This chapter discusses basic concepts in the welfare economics of resource allocation. It discusses the welfare economics of population size and whether a given allocation of resources between children and parental consumption is efficient. Whenever gauging the desirability of a given pattern of resource allocation, the widely agreed upon desideratum is the property of Pareto efficiency. A given social situation (allocation) is said to dominate another situation according to the Pareto criterion if some individuals are better off without anyone being worse off in the first situation. The chapter follows virtually all economists in taking this criterion to be the minimal normative requirement for a social welfare function. Most of the welfare-theoretic literature is concerned with the kinds or methods of social organization that are compatible with achieving the objective of Pareto efficiency. In particular, the fundamental propositions of welfare economics deal with the relationships between allocations resulting from equilibrium in perfectly competitive markets and Pareto efficiency. The chapter highlights these relationships. It also describes the concept of a competitive equilibrium. In a market economy, prices govern economic activities. The various economic agents plan their actions in response to these prices, according to their preferences, endow- ments, and technological know-how.