Demography and welfare economics

The focusing on demographic issues as an important part of welfare-economic assessment shifts the evaluative space in the direction of public discussion and social concern. A commoditycentred view of individual success and social welfare is often used in economics. But the linkage between our economic wealth and our ability to live as we would like has strong limits. This is partly because of interpersonal variations between individuals, but also because of variations in public and social arrangements (for example, for public health care, education and social security). The use of demographic perspectives can enrich economic analysis in several ways. In particular a demographically oriented system of evaluation can not only focus on variables that we all value, but it also gives us the freedom to decide what weights would be most appropriate for the exercise in which we might be engaged. The problem of valuation in welfare economics is ultimately a social-choice issue, requiring the use of explicit judgments on which the society can achieve some consensus through political processes.Lecture presented to the annual meeting of the Austrian Economic Association in Vienna, 24 May 1994. The author is grateful for support from the National Science Foundation for the research on which this paper draws.     

Beyond welfare economics: some methodological issues

When one wishes to formulate, evaluate and implement public policies, the existence of a plurality of social actors, with interest in the policy being assessed, generates a conflictual situation. How such a conflict should be dealt with? This paper defends the thesis articulated in the following points: (1) Different metrics are linked to different objectives and values. To use only one measurement unit (on the grounds of the so-called commensurability principle) for incorporating a plurality of dimensions, objectives and values, implies reductionism necessarily. (2) Point (1) can be proven as a matter of formal logic by drawing on the work of Geach about moral philosophy. This theoretical demonstration is an original contribution of this article. Moreover, here the distinction between predicative and attributive adjectives is formalised and definitions are provided. Predicative adjectives are further distinguished into the new categories of absolute and relative ones. The new concepts of set commensurability and rod commensurability are introduced too. (3) Weak comparability of values, which is grounded on incommensurability, is proposed as the main methodological foundation of well-being evaluation. Incommensurability does not imply incomparability; on the contrary incommensurability is the only possible way to compare societal options under a plurality of policy objectives. Weak comparability can be implemented by using multicriteria evaluation, which is a formal framework for applied consequentialism under incommensurability.     

The pareto rule and welfare economics

It is [my] contention... that the wake for all welfare economics is premature, and that welfare economics can be reconstructed with the aid of the concept of demonstrated preference. This reconstruction, however, will have no resemblance to either of the “old” or “new” edifices that preceded it. In fact...our proposed resurrection of the patient may be considered by many as more unfortunate than his demise.     

The welfare economics of the socialization of commodities

Socialization is defined for the purpose of this paper as the acquisition by the goverment of the total output of a commodity such as medical services and redistribution of that commodity equally to all citizens. Simple general equilibrium models are constructed to show that when decisions are reached by majority rule a commodity is more likely to be socialized the greater the inequality of income in the community and the less diverse the tastes of individuals for that commodity. The interests of producers of commodities are also taken into account, and strategic aspects of voting about socialization are discussed.     

The welfare economics of dominant-firm acquisitions

Conclusion The main results of this paper provide some analytic underpinning for a strict horizontal merger policy relating to dominant firms. However, even under standard assumptions, examples have been demonstrated where dominant/fringe firm mergers increase welfare. Most of these examples imply shutting down acquired facilities, a practice regarded as unfavorable evidence by the court in theStandard Oil case; consequently, they do not by themselves seem to offer much hope for raising economies as an antitrust defense. Finally, it should be noted that this paper has considered only single-product economies; economies of scope arising in multi-product (and multi-market) contexts could be large enough to justify dominant/fringe firm mergers⁹.An earlier version of this paper was presented at the Economic Policy Office seminar, Antitrust Division, U. S. Department of Justice. The author is grateful to Marius Schwartz, other seminar participants and an anonymous referee of this journal for helpful comments. M. Daniel Westbrook and Brian Flynn kindly arranged for the calculations reported in Appendix C.     

A reformulation of the foundations of welfare economics

Neoclassical welfare economics takes an outcome-oriented approach that uses Pareto optimality as its benchmark for welfare maximization. When one looks at the remarkable improvements in economic welfare that have characterized market economies, most of those improvements in welfare have been due to economic progress that has introduced new and improved goods and services into the economy, and innovations in production methods that have brought costs down, leading to higher real incomes. Pareto optimality is only peripherally related to actual economic welfare, and no economist would argue that people are materially better off today than a century ago because the economy is closer to Pareto optimality. After analyzing the actual factors that lead to improvements in welfare, this paper suggests a reformulation of the foundations of welfare economics to replace the almost irrelevant outcome-oriented concept of Pareto optimality as the benchmark for evaluating welfare with a process-oriented benchmark based on factors that generate economic progress. The paper then explores some implications of this reformulation.

On the second optimality theorem of welfare economics

To what extent does the second optimality theorem of welfare economics (every Pareto optimal allocation can be repesented as a Walras equilibrium allocation) remain valid when preferences are allowed to be locally satiated? It is always valid for an exchange economy, and is valid for a production economy if there is a consumer who is not locally satiated, but not in general for a production economy where all consumers are locally satiated. A generalized equilibrium is defined, which includes the Walras equilibrium as a special case. Every Pareto optimum can be represented as a generalized equilibrium allocation. Furthermore, every Pareto optimal utility distribution can be realized by a Walras equilibrium allocation.     

Economic inequality and paretian welfare economics: Some insinuating questions

This paper examines the academic soundness of the Pareto welfare criterion as a normative rule for evaluating alternative economic inequality scenarios and suggests that the criterion has several weaknesses, which weaken its usefulness. First, the Pareto principle is of limited use in the inequality debate because labor markets hardly satisfy the conditions of perfect competition, the pivotal assumption of the theory. Second, the proposition that competitive equilibrium leads to the “common good” of society is difficult to defend. Third, the Paretian welfare economics barely answers the questions society demands, because perfect competition does not guarantee fairness in the determination of relative prices in the initial situation of income distribution. Fourth, in the distribution theory, the marginal productivity principle determines the rewards to the factors of production. If we assume that rent, wage and interest incomes are determined by this theory, then questions arise about how profits, the potentially huge surpluses generated by the businesses, are distributed. Fifth, income distribution, being a public policy topic, is a political issue. However, Pareto's primary motivation in formulating the principle was to alienate the income distribution debate from political and policy discourses. Finally, by invoking the Pareto principle, economists are in fact avoiding the real issues of the public debate on personal distribution of income. Personal income distribution truly refers to division of income generated by a group of people working together and therefore, ought to be analysed with reference to the sector of employment. Thus, Tommy Franks' earning should be compared with that of a private, while an ordinary worker's salary should be compared with that of the CEO. History testifies that the public earning structure is much more equitable than that of the private sector. This poses a very serious question: Which earning structure reflects improvement in social welfare: public or private?     

Economic inequality and paretian welfare economics: Some insinuating questions

Capitalists, managers, unions and government today have espoused employee ownership and participation in order to further their own selfish ends. By so doing, they unwittingly usher in full workers' democracy, and concomittant radical transformations of the socioeconomic system which, ironically, will curtail their power. These transformations would stem from our populist ideological roots and would promote profound changes in the distribution of political power and in the way the society deals with technology.     

Toward a deconstruction of utility and welfare economics

David Gordon is a senior fellow with the Ludwig von Mises Institute.     

Second best welfare economics in the mixed economy

The general problem of measuring welfare for large government projects is considered in a context where the government may interfere with the private market sector in a variety of ways. Measures are decomposed into a pure efficiency part and a pure equity part and it is shown that the efficiency part is measured by integrals under ‘uncompensated’ market demand functions. It is also shown that the efficiency part may be further decomposed into second best contributions due to commodity taxation, monopoly power and quantity constraints.     

Social choice and welfare economics under representative government

In his Impossibility Theorem, Arrow demonstrated logically that certain a priori conditions cannot all be satisfied by a rule of social choice. Those conditions, however, are admittedly value judgments, and how ethically impelling they are remains in dispute. To appraise that matter, the theorem is properly seen in a political context, and Arrow himself has seen it so, but he focuses in effect on ‘direct democracy.’ Further clarification may result from reference instead to different forms of ‘representative government.’ The same inquiry may also illuminate another still controversial matter: the import of the theorem for welfare economics.     

The welfare economics of a health plan merger

Recently, two large health maintenance organizations (HMOs) in Minneapolis merged to form a single company with over half of the total Twin Cities HMO enrollment. This paper strongly suggests that the merger will have adverse consequences for consumers. I use a model of health plan rivalry and empirical demand functions to predict that health insurance premiums in 6 Twin Cities firms will rise by as much as 19 percent after the merger. Next, I show how to calculate the loss in consumer surplus in a discrete choice model and predict that the merger will reduce surplus by 4.4% on average. Several objections to these conclusions are considered but, on the whole, the analysis raises serious concerns for public policy toward HMO mergers.     

Dual interpersonal comparisons of utility and the welfare economics of income distribution

Interpersonal comparisons can be of utility levels and/or of utility differences. Comparisons of levels can be used to define equity in distributing income. Comparisons of differences can be used to construct an additive Bergson social welfare function over income distributions. When both utility levels and utility differences are compared, one can require the constructed additive Bergson social welfare function to indicate a preference for more equitable income distributions. This restricts the form of both the individual utility functions and the optimal distribution of income. The form of these restrictions depends on whether the levels and differences of the same utility functions are being compared.     

Entry regulation and social welfare with an integer problem

This paper elaborates on Salop (1979) who showed that the number of firms at free-entry equilibrium is excessive from the viewpoint of social welfare (excess-entry theorem). This paper considers an integer problem of the number of firms entering the market. We find that the excess-entry theorem does not hold true if the marginal production cost is increasing, while it holds true if the marginal production cost is constant. This result warns against the use of the excess-entry theorem for rationalizing entry regulation such as the notorious Japanese Large-Scaled Retail Act restricting the new entry of retailers.