Question

Analyse two definitions of economic welfare in detail.

Answer 1

1. A.C. Pigou’s definition of economic welfare:

• According to A.C. Pigou, economic welfare is that part of social welfare which “can be brought directly or indirectly into relation with the measuring rod of money.” In other words, economic welfare refers to the satisfaction or utility derived by individuals from the consumption of goods and services that are exchangeable in the market.
• Pigou assumes that different individuals derive the same satisfaction (utility) from the same real income and that interpersonal comparisons of utility are possible.
• For Pigou, economic welfare is closely linked to national income; when national income grows, total welfare increases, assuming the marginal utility of money is diminishing but comparable across people. Thus, transfer of income from richer to poorer tends to increase total social welfare because the poor are assumed to gain more utility from additional income than the rich lose from a similar income loss.

2. Vilfredo Pareto’s concept of economic welfare:

• Vilfredo Pareto defines total economic welfare as the sum of individual welfares but insists that interpersonal comparisons of welfare are not possible or meaningful. Thus, he rejects Pigou’s assumption that utilities can be compared between individuals.
• Pareto's criterion of economic efficiency or social optimum is that an allocation is “Pareto optimal” or “Pareto efficient” if no reallocation can make one person better off without making at least one other person worse off.
• This means economic welfare is seen as a state or condition of allocation rather than a measurable amount; welfare improves only if a change leads to at least one individual being better off without harming others.
• This concept prioritizes respect for individual utilities without comparing them across persons, emphasizing efficiency over equity.
• Hence, Pareto welfare is a normative benchmark for judging economic states but does not provide a magnitude measure of aggregated welfare or accept redistribution that harms someone, even if overall welfare could increase.