Enter the characters you see below Sorry, we just need to make sure you’re linear utility function maximization a robot. This article’s tone or style may not reflect the encyclopedic tone used on Wikipedia. See Wikipedia’s guide to writing better articles for suggestions. The field of welfare economics is associated with two fundamental theorems.
Did not find what they wanted? Try here
Attempting to apply the principles of welfare economics gives rise to the field of public economics, the study of how government might intervene to improve social welfare. The early Neoclassical approach was developed by Edgeworth, Sidgwick, Marshall, and Pigou. Utility is cardinal, that is, scale-measurable by observation or judgment. Preferences are exogenously given and stable. With these assumptions, it is possible to construct a social welfare function simply by summing all the individual utility functions. The New Welfare Economics approach is based on the work of Pareto, Hicks, and Kaldor.
It explicitly recognizes the differences between the efficiency aspect of the discipline and the distribution aspect and treats them differently. Situations are considered to have distributive efficiency when goods are distributed to the people who can gain the most utility from them. Many economists use Pareto efficiency as their efficiency goal. According to this measure of social welfare, a situation is optimal only if no individuals can be made better off without making someone else worse off. The marginal rates of substitution in consumption are identical for all consumers. This occurs when no consumer can be made better off without making others worse off.