Welfare economics is a field of economics that looks at the problem of allocating resources. It uses techniques from microeconomics to assess general well-being. From this assessment, it tries to find an allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyzes social welfare in terms of economic activities of the individuals that compose the theoretical society considered. Individuals and their economic activities are the basic units for aggregating to social welfare. The aggregation may focus on a group of people, a community, or a society. There is no "social welfare" apart from the "welfare" associated with its individual units.
Welfare economics typically takes individual preferences as given and tries to improve welfare in terms of Pareto efficiency. As an example, social state B is "better" than social state A, if at least one person prefers B and no one else opposes it. Another aspect of welfare treats income/goods distribution, including equality, as a further dimension of welfare.
Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be defined as the sum of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of "utils" or dollars, or measured ordinarily in terms of Pareto efficiency. The cardinal method in "utils" is rarely used in pure theory today. Its main problem is that different kinds of "utility" cannot easily be summed up without losing the meaning of the measurement. In applied welfare economics money-value estimates are often used. One example of applied welfare economics is cost-benefit analysis. Money-value estimates are a useful form of measurement where income-distribution effects are factored into the analysis or seem unlikely to change the analysis.
The capabilities approach to welfare argues that freedom - what people are free to do or be - should be included in welfare assessments, and the approach has been particularly influential in development policy circles where the emphasis on multi-dimensionality and freedom has shaped the evolution of the Human Development Index.
- Deardorff's Glossary of International Economics (2006). "Welfare economics."
- I.M.D. Little, A Critique of Welfare Economics (1950). There are many such proposed measures of welfare, including the Theil index and those in Amartya Sen On Economic Inequality, Annexe with James E. Foster (1997), Clarendon Press, Oxford, ISBN 0-19-828193-5.