Understanding the Study of Welfare Economics.
                     Understanding the Study of 
Welfare Economics
What Is Welfare Economics?
• Welfare economics is the study of how the structure of markets and the 
allocation of economic goods and resources determines the overall well-
being of society. 
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Aim of Welfare Economics?
• The aim of welfare economics is the overall well-being of society. Hence, 
welfare economics involves an evaluation of the economic policies, guiding 
the public policies for the greater good of society. 
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Underlying assumptions
• The underlying assumptions of the study are measurability and 
comparability of social welfare across various sections of society and ethical 
and philosophical considerations about social well being.
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Theories of Welfare Economics
1) Pareto Optimality
2) Kaldor-Hicks Compensation Criterion
3) Scitovsky Double Criterion
4) Social Welfare Function of Bergson and Samuelsson
5) Amartya Sen’s View on Social Welfare
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Involves the application of utility theory
• It involves the application of utility theory in economics. Utility refers to the 
value perceived by the society of the goods and services offered to the 
society. 
• In the utility theory, consumers will seek to maximize their utility in their 
actions as buyers with sellers through the laws of demand and supply.
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Evaluation
• There are various criteria to measure whether the welfare gains arising from a change 
to the economy would outweigh the losses if any. 
• When analysed in terms of Pareto efficiency, resources cannot be allocated to make 
one individual better off without making one or more individual worse off. 
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Role of Value Judgements in Welfare 
Economics
• It is important to explain the role of value judgements in welfare economics. Since 
welfare economics is concerned with the desirability or otherwise of economic 
policies, the value judge ments play a crucial role.
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Individual choices 
• Individual choices differ because various individuals have different tastes, prefer 
ences and ethical beliefs and therefore different value judgements. 
• The vital issues in welfare economics are concerned with social welfare and devising 
certain criteria to judge the social welfare.
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Conclusion
• Welfare economics seeks to achieve a state that will maximise the overall satisfaction 
for a society, maximising the producer and consumer surplus for the various markets 
comprised in the society.
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