 |
Business | Industries | Finance | Tax |
| Index: > A B C D E F G H I J K L M N O P Q R S T U V W X Y Z |
|
|||||
| First Prev [ 1 2 3 ] Next Last |
Utility functions can be derived from the points on a contract curve. Numerous utility functions can be derived, one for each point on the production possibility frontier (PQ in the diagram above). A social utility frontier (also called a grand utility frontier) can be obtained from the outer envelope of all these utility functions. Each point on a social utility frontier represents an efficient allocation of an economies resources, that is it is a Pareto optimum in factor allocation, in production, in consumption, and in the interaction of production and consumption (supply and demand). In the diagram below, the curve MN is a social utility frontier. Point D corresponds with point B from the earlier diagram. Point D is on the social utility frontier because the marginal rate of substitution at point B is equal to the marginal rate of transformation at point A. Point E corresponds with point C in the previous diagram, and lies inside the social utility frontier (indicating inefficiency) because the MRS at point C is not equal to the MRT at point A.
Although all the points on the grand social utility frontier are Pareto efficient, only one point identifies where social welfare is maximized. This is point Z (sometimes called the bliss point) where the social utility frontier MN is tangent to the highest possible social indifference curve labelled SI.
Welfare economics uses many of the same techniques as microeconomics and can be seen as intermediate or advanced microeconomic theory. Its results are applicable to macroeconomic issues so welfare economics is somewhat of a bridge between the two branches of economics.
Cost-benefit analysis is a specific application of welfare economics techniques, but excludes the income distribution aspects. Political science also looks into the issue of social welfare (political science), but in a less quantitative manner. Human development theory explores these issues also, and considers them fundamental to the development process itself.Many doubt whether a cardinal utitity function (or cardinal social welfare function) is of any value. How do you aggregate the utilities of various people that have differing marginal utility of money (ie, the rich and the poor)?
Some even question the value of ordinal utility functions. They have proposed other means of measuring well-being as an alternative to price indices, "willingness to pay" functions, and other price oriented measures. These price based measures are seen as promoting consumerism and productivism by many. It should be noted that it is possible to do welfare economics without the use of prices, however this is not always done.
Value assumptions explicit in the social welfare function used and implicit in the efficiency criterion chosen, make welfare economics a highly normative and subjective field. This can make it controvertial. If these value assumptions are hidden or uncritically accepted, welfare economics could be dangerous.
Welfare economics techniques are held hostage to their initial starting point. Welfare maximization is optimum relative to the initial starting position.
Marginal rates of substitution ignores Veblenesque effects.
| Politics | Business | Finance |
 |
 |
 |
|