Welfare Economics Towards a More Complete

This book attempts to make welfare economics more complete by discussing the recent inframarginal analysis of division of labor and by pushing welfare economics from the level of preference to that of happiness, making a reformulation of the foundation of public policy necessary.

Yew-Kwang Ng is Personal Chair in Economics, Monash University, Australia.

Preface

ix

List of Abbreviations

xii

List of Symbols

xiii

1 Introduction

1

(25)

1.1 What is welfare economics?

2

(3)

1.2 Is welfare economics a positive or normative study?

5

(1)

1.3 Welfare versus utility

6

(10)

1.4 Utility measurability and interpersonal comparability

16

(2)

1.5 The organisation of the book

18

(1)

1.6 Summary

19

(1)

Appendix 1.1: Basic Value Judgments and Subjective Judgments of Fact

19

(7)

2 Pareto Optimality

26

(21)

2.1 The Pareto principle

26

(2)

2.2 The conditions for Pareto optimality

28

(10)

2.3 The attainment of Pareto optimality

38

(4)

2.4 Summary

42

(1)

Appendix 2.1: The First-Order Conditions for Pareto Optimality

43

(4)

3 The Direction of Welfare Change: Welfare Criteria

47

(18)

3.1 The debate on compensation tests

47

(5)

3.2 Taking distribution into account: Little's criterion

52

(5)

3.3 The inadequacy of purely distributional rankings

57

(4)

3.4 Retreat to purely efficiency comparisons

61

(1)

3.5 Quasi-Pareto improvements

62

(2)

3.6 Conclusions

64

(1)

3.7 Summary

64

(1)

4 The Magnitude of Welfare Change: Consumer Surplus

65

(27)

4.1 The origin of the concept: Dupuit and Marshall

65

(1)

4.2 Hicks' four measures and the average cost difference

66

(4)

4.3 Which measure?

70

(2)

4.4 Aggregation over commodities: the issue of path dependency

72

(4)

4.5 Aggregation over individuals: the Boadway paradox

76

(2)

4.6 The approximate nature of surplus measurement

78

(2)

4.7 Consumer surplus of diamond goods

80

(2)

4.8 Some uses of surplus measurement

82

(3)

4.9 Summary

85

(1)

Appendix 4.1: CV, EV or Marginal Dollar Equivalent?

86

(4)

Appendix 4.2: Acceptability of the Marshallian Measure The Benchmark Case of a Cobb-Douglas Utility Function

90

(2)

5 Social Choice

92

(35)

5.1 Arrow's impossibility theorem

92

(6)

5.2 The impossibility propositions by Kemp-Ng and Parks

98

(3)

5.3 Can the paradox of social choice be resolved?

101

(6)

5.4 Revealing the intensity of preferences

107

(8)

5.5 A dollar is a dollar: a 90 per cent solution to the paradox of interpersonal cardinal utility

115

(4)

5.6 The possibility of a Paretian liberal

119

(1)

5.7 Summary

120

(1)

Appendix 5.1: The Incompatibility of Individualism and Ordinalism

121

(6)

6 The Optimal Distribution of Income

127

(17)

6.1 Conceptual determination of optimal distribution

127

(2)

6.2 Utility illusion

129

(2)

6.3 Theories of optimal income distribution and taxation: Lerner and Mirrlees

131

(4)

6.4 Discussion

135

(6)

6.5 Concluding remarks

141

(2)

6.6 Summary

143

(1)

7 Externality

144

(20)

7.1 The concept and classification of externalities

144

(3)

7.2 Divergence from optimality and the tax/subsidy solution

147

(5)

7.3 Other solutions

152

(2)

7.4 The conscience effect

154

(4)

7.5 The Coase theorem and liability rules

158

(4)

7.6 Summary

162

(2)

8 Public Goods

164

(23)

8.1 Basic characteristics of public goods

164

(3)

8.2 Optimality conditions and the financing of public goods

167

(7)

8.3 An incentive-compatible mechanism for preference revelation

174

(6)

8.4 Income distribution as a peculiar public good: the paradox of redistribution

180

(2)

8.5 Economic theories of clubs

182

(1)

8.6 Summary

183

(1)

Appendix 8.1: The Paradox of Redistribution and the Paradox of Universal Externality

184

(3)

9 First, Second or Third Best?

187

(43)

9.1 The theory of second best

188

(5)

9.2 Softening the blow of second best

193

(3)

9.3 A theory of third best

196

(7)

9.4 Towards a third-best policy

203

(5)

9.5 Summary

208

(1)

Appendix 9.1: A Dollar is a Dollar - Efficiency, Equity and Third-Best Policy

208

(22)

10 Beyond Marginal Analysis: Perspectives from an Inframarginal Analysis of the Division of Labour

230

(27)

10.1 Towards a more complete welfare economics

230

(1)

10.2 Marginal versus inframarginal analysis

231

(1)

10.3 Basic inframarginal analysis of the division of labour

232

(2)

10.4 The devastating implications of increasing returns on some traditional conclusions

234

(6)

10.5 The Smith dilemma and its resolution

240

(3)

10.6 The Pareto optimality of general equilibrium in the new framework - the role of entrepreneurs

243

(3)

10.7 Welfare economic issues and the division of labour

246

(4)

10.8 Implications

250

(3)

10.9 Summary

253

(1)

Appendix 10.1: A Simple Model of the Yang-Ng Framework of Specialisation

254

(3)

11 From Preference to Happiness

257

(27)

11.1 Preference economics or welfare economics?

257

(4)

11.2 Developments that have prompted a reconsideration

261

(14)

11.3 A simplified analysis of welfare

275

(2)

11.4 Implications and concluding remarks

277

(5)

11.5 Summary

282

(2)

12 Conclusion: Towards an Interdisciplinary Study of Welfare?

284

(22)

12.1 Further considerations

287

(6)

12.2 Towards an interdisciplinary study of welfare

293

(3)

12.3 Summary

296

(1)

Appendix 12.1: Notes and References on Some Advanced and Applied Topics

297

(9)

References and Author Index

306

(45)

Subject Index

351

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Welfare Economics Towards a More Complete Analysis

Summary

Author Biography

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Summary

Author Biography

Table of Contents

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