Welfare economics/Tutorials

Social Welfare

The controversy among economists concerning the concept of social welfare is not dwelt on in the article because it has had little effect upon the practice of economics, but it may be of interest to philosophers and students of economics. The debate started in the 1920s with the publication of Pigou's "Economics of Welfare" . Pigou observed that a unit increase in income adds more to the welfare of poor man than it adds to that of a rich man, and concluded that social welfare would be increased by a transfer from the rich to the poor. The first dissent came from Lionel Robbins, who argued that Pigou's analysis was faulty because it required interpersonal comparisons of welfare, and urged a return to Pareto's "unanimity rule" which had been proposed by Vilfredo Pareto, which stated that it could not be assumed that welfare would increase unless there would be some gainers and no losers . The next development was the Arrow-Debreu proof that, on the assumptions noted in the article, an interacting system of markets could reach an equilibrium in which all markets clear simultaneously (known as the "existence theorem" and referred to in some texts as the first fundamental theorem of welfare economics). That was followed by the publication of the two theorems set out in the article .