Welfare economics
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Welfare economics is the branch of economics that judges how a given allocation of resources affects the well-being of society. It asks whether an outcome is good, using criteria such as:
- efficiency: Pareto efficiency, allocative efficiency and productive efficiency;
- equity: fairness in how gains are shared.
Its main tools are consumer surplus, producer surplus and deadweight loss. It gives us the two welfare theorems. The first says a competitive equilibrium is Pareto efficient. The second says any efficient outcome can be reached through markets after the right lump-sum redistribution. It is also the basis for identifying market failure and deciding when the state should step in.
Example
Take a monopoly with demand P = 100 − Q and MC = 20. Welfare economics shows that total surplus falls from 3,200 under competition to 2,400 under monopoly. The loss of 800 is a deadweight loss, and it gives the case for competition law.
Related concepts
- Pareto efficiency
- Pareto improvement
- Allocative efficiency
- Productive efficiency
- Kaldor-Hicks efficiency
- Social welfare function
- Theory of the second best