Welfare economics analyses different states in which markets or the economy can be. Its main objective is to find an indicator or measure in order to guarantee that markets are behaving optimally, thus also guaranteeing that consumer welfare is as high as possible. Even though welfare was already analysed by economists such as Adam Smith or Jeremy Bentham, it was economists from the Classical School who thoroughly analysed the subject: Alfred Marshall saw a relationship between welfare and wealth, while other economists such as Vilfredo Pareto and Arthur C. Pigou analysed welfare in terms of better resource allocation and efficiency.
In this Learning Path, we’ll learn about the basics of welfare economics. More specifically, we’ll learn about:
Definition and main economists
Welfare economics, a short definition;
Arthur C. Pigou, the first economist to thoroughly analyse welfare issues;
Vilfredo Pareto, who developed models in order to seek efficiency.
Efficiency and optimal allocation
Pareto optimality, a concept devised by Vilfredo Pareto;
Edgeworth box, an important analytical tool;
Production possibility frontier, which we derive from the Edgeworth box;
General equilibrium, an analysis of how to properly allocate resources;
Fundamental theorems, the two main conclusions of welfare economics.