Welfare Economics in Theory and Practice PDF
Preview Welfare Economics in Theory and Practice
Welfare Economics in Theory and Practice Macmillan books of related interest P. J. Curwen and A. H. Fowler: ECONOMIC POLICY Ajit K. Dasgupta and D. W. Pearce: COST-BENEFIT ANALYSIS J. Harvey: MODERN ECONOMICS (2nd edn) S. K. Nath: A PERSPECTIVE OF WELFARE ECONOMICS D. W. Pearce : COST-BENEFIT ANALYSIS Peter Self: ECONOCRATS AND THE POLICY PROCESS Welfare Economics in Theory and Practice CATHERINE M. PRICE M © Catherine M. Price 1977 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. First published 1977 by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies in New York Dublin Melbourne Johannesburg and Madras ISBN 978-0-333-19838-4 ISBN 978-1-349-15739-6 (eBook) DOI 10.1007/978-1-349-15739-6 This book is sold subject to the standard conditions of the Net Book Agreement. The paperback edition of this book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher's prior consent, in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. Contents Preface vii PART ONE: THEORY 1 The Basis of Welfare Economics 3 2 The Compensation Principle 19 3 The Second Best 31 4 Efficiency in a Dynamic Economy 46 5 Assessment of Neoclassical Welfare Economics 58 PART TWO: POLICY 6 Investment Policy 65 7 Pricing Policy 84 8 Cost-Benefit Analysis 99 9 U. K. Public Policy since 1945 110 PART THREE: PRACTICE - SOME EXAMPLES 10 Exploiting the United Kingdom's Oil Reserves 127 11 Peak-Load Pricing 139 12 The Third London Airport - A Cost-Benefit Analysis 149 13 Resource Costs of Mining Labour 163 Bibliography 169 Index 173 Preface This book is intended for second- and third-year undergraduates and postgraduates who are studying the economic basis of public policy and is designed to provide a basic text for a variety of courses con cerned with microeconomic decision-making. It assumes an elemen tary knowledge of the tools of economic analysis (at the level of an in troductory course in the subject) but should prove useful to students who are not necessarily economic specialists. The author's main objec tive is to fill the gap which currently exists between highly specialised and involved works on economic theory and those with a more prac tical slant, by providing some progression from theory to practice. To achieve this, the book has been divided into three parts, each with four main chapters. Part One considers the theoretical implications of neoclassical welfare analysis, Part Two derives some policy guidelines, and Part Three uses four examples of practical issues to illustrate the ideas developed earlier. Of necessity the material presented is highly selective, and some readers will wish to examine particular aspects in greater depth; there are many more specialised works appropriate for such a purpose, some of which are listed in the bibliography. It is hoped that the present book will provide a useful background against which some of the more esoteric literature can be assessed in a broader context of theoretical and practical issues. I am most grateful to my husband, Christopher, for preparing the diagrams and for his encouragement and tolerance which have enabled me to combine writing this book with my family commitments. I should also like to acknowledge help from Roger Nellist of the Depart ment of Energy in commenting on Chapter 10, and from John Bates, senior lecturer in economics at Nottingham University, for discussing Part Two, and for inspiring and guiding my original interest in welfare economics. viii Preface I hope that this book may help its readers to discover for themselves some of the fascination which I have found in the area of theoretical analysis and public policy. Part One Theory Chapter 1 The Basis of Welfare Economics The welfare of an individual or community can be defined as its well being, or, more picturesquely, its attainment of bliss. Welfare economics is concerned with the effect of economic policies on the level of welfare of individuals or groups of people. The analysis is used to compare the relative merits of two situations by assessing the level of welfare in each, and in doing so is dependent on a variety of conven tional economic tools. However, this branch of the subject differs from the purely descriptive analysis of other economic approaches by attempting to ascertain how far one position is better than another rather than in merely identifying the characteristics of each. In this sense welfare economics is normative in prescribing recommendations and not purely positive (or descriptive) like much of the subject matter in economics. Thus, while an empirical approach might show the Government the likely effects of different investment programmes, a welfare economist would attempt to combine these forecasts with a set of priorities to recommend a particular project as yielding greater welfare than the alternatives. In analysing proposals in this way the welfare economist clearly has to work closely with Government and others who are responsible for detennining in what direction society's interests lie. An economist's
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