Social welfare function
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
A social welfare function ranks different states of society, from better to worse, by combining the well-being (utility) of all individuals into one measure. It has to decide how much each person's gain or loss counts, so it always involves value judgements about fairness, not just efficiency. Two well-known forms are:
- Utilitarian (Bentham): maximise the total of everyone's utility.
- Rawlsian: maximise the welfare of the worst-off person. This is also called maximin.
It matters because the Pareto test cannot choose between the many efficient outcomes that are possible. A social welfare function can.
Example
Suppose a policy raises the income of rich farmers a lot but slightly lowers that of landless labourers. A utilitarian function may approve it, because total utility rises. A Rawlsian function would reject it, because the worst-off group loses.
Related concepts
- Pareto efficiency
- Pareto improvement
- Allocative efficiency
- Productive efficiency
- Welfare economics
- Kaldor-Hicks efficiency
- Theory of the second best