Introduction
Welfare economics, one of the concepts in economics dealing with the allocation of resources for the maximization of social welfare, is subject to a series of evolutions in its development. Traditional welfare economics heavily relied on efficiency and the functioning of the market in attaining social welfare through the works of economists such as Alfred Marshall and Arthur Pigou. It has, however, been criticized for its narrow coverage and inability, for example, to highlight inequality and externalities. This was followed by a new course in welfare economics, pioneered by scholars such as Kenneth Arrow and Amartya Sen, who favored an enlarged perspective that would include social values and distributive justice. This essay will focus on the criticisms of traditional welfare economics and the differences between the old and new welfare economics.
Narrow Focus of Traditional Welfare Economics
In essence, traditional welfare economics focused on Pareto efficiency such that a situation would be ideal if and only if no one among all the concerned could be made better off without making someone else worse off. Despite Pareto optimality being a cornerstone of efficiency, its critics argue that concentrating on Pareto optimality makes invisible much important social welfare like equity and justice.
Poor Treatment of Inequality
A major criticism leveled against the traditional welfare economics is poor treatment of inequality, and recognition of efficiency gains by the approach notwithstanding. Many a time the approach ignores the distributional consequences of economic policies. Such negligence may lead to situations wherein the overall societal welfare has increased, yet the fruits are shared in such a way that they still lead to the increased gap between the rich and the poor (Steiner et al., 2020, p.191-204). They were of the view that a welfare analysis should not only consider the distributional impacts of policies but also seek to lead to an equitable distribution of resources.
Neglect of Externalities
The second limitation of traditional welfare economics lies in its treatment of externalities, where the actions of the individual or the firm confer costs or benefits on third parties not participants in the transaction. That is why, in traditional approaches, there are usually too few for the imposition of Pigouvian taxes or subsidies to cover the internalization of external costs or benefits. Still, critics advance the viewpoint that such instruments quite often do not cover the whole range of externalities, and hence the results can be suboptimal.
Emergence of New Welfare Economics
The new welfare economics was a response to several criticisms of neo-classical welfare economics to offer a general framework within which social welfare could be analyzed. Burnard & Riello (2020), argues that the traditional welfare economics with the related main approach to efficiency and functioning of the market is placed at a rather contrasting level of the new welfare economics including other social values and objectives, such as equity, distributional justice, and different kinds of individual preferences. It is in this area that the new welfare economics appreciates the fact that social welfare is subjective and is composed of a trade-off involving competing objectives.
Incorporation of Social Values and Preferences
One of the key differences between old and new welfare economics is the emphasis on social values and preferences. The new welfare economics knows that people have different preferences and values besides material well-being, even though the conventional approach sees welfare to be synonymous with utility or income. In this view, the paper concludes that democratic processes in decision-making are fundamentally important in the determination of social choices and proper resource allocations.
Conclusion
This effectively implies that all the criticisms of traditional welfare economics have led to the birth of the new welfare economics. Hence, new welfare economics offers a much better framework through an expanded scope in welfare analysis engaging the widest range of social values and preferences in targeting the promotion of social welfare. Policymakers in times to come will have to be inspired by old and new insights from welfare economics in the devising of efficient and equitable policies to confront the complexities lying ahead in modern society.
References
Burnard, T., & Riello, G. (2020). Slavery and the new history of capitalism. Journal of Global History, 15(2), 225-244.
Szeiner, Z., Mura, L., Horbulák, Z., Roberson, M., & Poór, J. (2020). Management consulting trends in Slovakia in the light of global and regional tendencies. Journal of Eastern European and Central Asian Research (JEECAR), 7(2), 191-204.
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