Welfare economics: Bentham, Pigou & Pareto Flashcards
Who were the economists that focused mostly on social issues found in welfare economics.
Jeremey Bentham (however he is an earlier economist not really in the era of welfare economics but his work is heavily associated with it), Vilfredo Pareto, Arthur Pigou
What was Bentham main theory? Explain
Utilitarianism - promote the greatest happiness for the greatest number of people
What did Bentham agree/disagree with about the classical and mercantilist schools of thought? Explain his views.
He believed that in some instances government intervention was required (classical school believes there should be government intervention but mercantilists believe they should play no part in it).
In cases of income inequality, income redistribution by the govt may increase the happiness of the poor, however, for the rich that work very hard for their wealth, taking some away will decrease their happiness. In cases of equality vs. security, equality comes first.
Whose concept of indifference curves did Pareto base his views on and how did his differ?
He borrowed the concept from Edgeworth.
Pareto considered utility to be ordinal (not cardinal), is measured given an indifference curve - preference ordering (not given utility) and analyzed by the convexity of the IC ( not that there is always decreasing marginal utility).
Pareto focused on indifference maps and Edgeworth on indifference curves.
What is Pareto optimality and what are the resulting implications?
When there are no further opportunities to make someone better off while making no one worse off maximum welfare is achieved.
- Optimal distribution of goods (= MRS)
- Optimal technical allocation of resources ( =MRS between labor and capital)
- Optimal quantities of outputs (MRS=MRT)
What views did Pigou inherit from Marshall? What did Pigou contribute to the inherited views?
Concept of externalities
The distinction between PMC, SMC, PMB and SMB.
Pigou supported government intervention particularly income redistribution. What views did he have concerning income distribution that were the opposite of previous economists (name them)?
Pareto believed that it is not possible to measure utility precisely thus, it shouldn’t be possible to make interpersonal utility comparisons. Pigou thought interpersonal comparisons could be made.
Pigou thought that income redistribution could improve welfare but this disagrees with Adam Smith’s view of government intervention causing more harm than good for the economy.
Under what conditions did Pigou believe income equality could increase economic welfare?
- Diminishing marginal utility of money exists
2. Interpersonal utility comparison is possible
