ebook img

Welfare Economics PDF

263 Pages·1994·8.683 MB·English
Save to my drive
Quick download
Download
Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.

Preview Welfare Economics

OXFORD IN INDIA READINGS Themes in Economics General Editors * Kaushik Basu * Prabhat Patnaik WELFARE ECONOMICS Edited by BHASKAR DUTTA DELHI OXFORD UNIVERSITY PRESS BOMBAY CALCUTTA MADRAS 1994 Oxford University Press, Walton Street, Oxford 0X2 6DP Oxford New York Toronto Delhi Bombay Calcutta Madras Karachi Kuala Lumpur Singapore Hong Kong Tokyo Nairobi Dar es Salaam Cape Town Melbourne Auckland Madrid and associates in Berlin Ibadan © Oxford University Press 1994 ISBN 019 563103 X typeset by Urvashi Press, Meerut 250 001 Printed at Rekha Printers Pvt. Ltd, New Delhi 110 020 and published by Neil O’Brien, Oxford University Press YMCA Library Building, Jai Singh Road, New Delhi IIP 001 Note from the General Editors As economics advances rapidly and becomes both more mathematical and statistically founded, the need arises to interpret its general prin­ ciples in the context of specific economies. In India, students are taught the latest models but it is usually left to them or the rare teacher to relate the models to the Indian context. The present series is an attempt to rectify this lacuna. Each book in this series presents the latest developments in a field and enunciates these in the context of the Indian economy. The series was conceived with senior undergraduate and post­ graduate students in mind. The aim is to provide accurate and interest­ ing books with contributions from leading economists. While each book has a volume editor, we—the general editors-^work with the volume editors in order to try and maintain some common norms and standards for the series as a whole. Initially there was a third general editor, the late Sukhamoy Chakra- varty. He was actively involved in the planning of the first few books in this series; and was a great source of inspiration to us till the last days of his life. Kaushik Basil Prabhat Patnaik Contents List of Contributors Introduction Bhaskar Dutta Market Failure and Information Dilip Mookherjee Efficient Resource Allocation under Increasing Returns Rajiv Vohra Optimal Taxation and India: A Review of Theory and Applied Work M.N. Murty and Pulin Nayak Price and Quantity Controls: A Survey of Some Major Issues Debraj Ray and Arunava Sen Some Non-Welfaristic Issues in Welfare Economics Prasanta K. Pattanaik Name Index Subject Index Contributors Bhaskar Dutta Indian Statistical Institute, Delhi Dilip Mookherjee Indian Statistical Institute, Delhi Rajiv Vohra Brown University, USA M.N. MURTY Institute of Economic Growth, Delhi Pulin Nayak Delhi School of Economics, Delhi Debraj Ray Boston University, USA ArunavaSen Indian Statistical Institute, Delhi Prasanta Pattanaik University of California, Riverside, USA Introduction Bhaskar Dutta Economics has always been concerned with prescriptions for public policy. Any prescription or recommendation of a particular policy must ultimately be based on an assertion that the proposed change will increase the ‘welfare of the society*. Assertions of this nature involve knowledge of two distinctly different kinds. First, how will the pro­ posed policy change affect ‘relevant’ economic variables? Second, how will changes in these economic variables affect social welfare? An answer to the first question is provided by the body of knowledge encompassing positive economics. Welfare economics, on the other hand, is concerned with various aspects of the second question. In particular, what aiy the components of social welfare? What is the meaning of maximizing or even increasing social welfare? Can one formulate (simple) sufficient conditions for an increase in social wel­ fare? A. Bergson’s notion of an (ordinal) social welfare function1 provid­ ed a framework within which various views on social welfare can be accommodated. Let a social state be a complete description of the amount of each type of commodity held by each individual, the amount of labour to be supplied by each individual, the amount of each productive resource invested in each type of productive activity, the structure of rights in society, and so on. In other words, the description of a social state must include eveiy variable which can conceivably affect the community’s welfare. Letting X denote the set of social states, a Bergson social welfare function W assigns a numeri­ cal social utility or welfare, W(x)9 to each social state x in X. The aim of society is then described by saying that it seeks to maximize social ‘See Bergsoo (1938). 2 BHASKAR DUTTA welfare subject to the relevant technological, resource, and institutional constraints.2 Bergson assumed that W(x), the value of social welfare in state x, would ‘depend on all the variables that might be considered as affect­ ing welfare’ (p. 417). Of course, this does not impose any constraint on the functional form of W. The construction of a particular social welfare function must be a normative procedure since it involves making value judgements. For each set of value judgements adopted, a different social welfare function will result. Hence, there is no sense in which the welfare economist can talk of a ‘unique’ or objective social welfare function. Is there a systematic way of choosing a particular Bergson-Samuel- son social welfare function? The work of Arrow (1963) can be seen as an attempt at answering this question. Arrow defined a Social Welfare Function—henceforth SWF (to be distinguished from the Bergson- Samuelson swf) as a functional relation / specifying one social order­ ing R for any n-tuple of individual orderings {/?,} defined over X. R -/({*,}) (1) Note that since the Bergson-Samuelson swf is an ordinal concept, it can be viewed as a numerical representation of a social ordering R. Hence, the Arrow SWF is a function the value of which is a Bergson- Samuelson swf. Alternatively, the Arrow SWF is a method of ag­ gregating individual preferences into a social preference ordering. Arrow proceeded to impose seemingly mild conditions that a reason­ able SWF could be expected to satisfy. These conditions are defined below. In these definitions (and subsequently), N - {1,2,..., n} is the society. Condition U (Unrestricted Domain). The domain of the SWF in­ cludes all logically possible /i-tuples of individual orderings over X. Condition D (Non-dictatorship). There is no individual i such that for 2Although Bergson introduced the concept of a social welfare function, it was really Samuelson (1947) who investigated the uses to which such a function can be put. Not surprisingly, this concept has come to be known as a Bergson-Samuelson social welfare function. Introduction 3 all preference n-tuples in the domain SWF /, for each ordered pair x,yEX,xPiy-+xPy. Condition P (Pareto). For all ordered pairs x,yEX, if for all in­ dividuals iEN9xPiy-+xPy. Condition I (Independence of Irrelevant Alternatives). For all x,y EX, for all /t-tuples {/?,} and {/?/}, if for all i EN, xRjy ++xRjy, then xRy ++ xR!y where R -/({/?*}) andR' -/({/?/}). Arrow proved the following remarkable result. General Possibility Result. If X contains at least 3 distinct states, then there is no SWF satisfying Conditions U, I, P, and D. This basic result has given birth to the field of social choice theory. This literature has explored the possibility of evading the nihilistic conclusion of the General Possibility Result by relaxing the original Arrow conditions. Unfortunately, the basic impossibility result is rem­ arkably robust to such modifications within the traditional Arrovian framework.3 It has been suggested that the main reason for the plethora of impossiblity results in the Arrovian framework is that the framework fails to utilize a great deal of information. First, the traditional Ar­ rovian framework assumes that individual utilities are ordinal and interpersonally non-comparable. Of course, it has been pointed out by Sen (1970a) that allowing for cardinal but non-comparable utilities makes no differences to the basic impossibility result. However, as I will point out later, once the possibility of interpersonal comparability is introduced, several interesting SWFs satisfy suitably modified ver­ sions of the original Arrow conditions. Second, the Arrow framework involves welfarism, thereby ruling out the use of non-utility information. Welfarism means that the social welfare in state x is solely a function of the individual utilities in that state. Hence, social welfare must be identical in social states x and y if both result in the same individual utility distribution. In particular, the process by which individuals derive their utility can have no impact on social welfare. ^or excellent accounts of this literature, see Kelly (1978) and Sen (1986).

See more

The list of books you might like

Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.