What is 'Welfare Economics'

Welfare economics focuses on the optimal allocation of resources and goods and how the allocation of these resources affects social welfare. This relates directly to the study of income distribution and how it affects the common good. Welfare economics is a subjective study that may assign units of welfare or utility to create models that measure the improvements to individuals based on their personal scales.

BREAKING DOWN 'Welfare Economics'

Welfare economics looks at the distribution of resources and how it affects an economy's overall sense of well-being. With different optimal states existing in an economy in terms of the allocation of resources, welfare economics seeks the state that will create the highest overall level of social satisfaction among its members.

Welfare economics uses the perspective and techniques of microeconomics, but they can be aggregated to make macroeconomic conclusions. Some economists suggest that greater states of overall social good might be achieved by redistributing incomes in the economy. This models the theories behind economic, or allocative, efficiency, suggesting that there exists a point where the social well-being experienced from the allocated resources can hit a maximum, a point considered to be the most efficient. If that point is reached, the economy is functioning in a way that any subsequent changes to raise the feelings of well-being in one area would require the lowering of well-being in another.

Welfare Economics and Public Policy

Issues regarding welfare economics may serve as guides during the creation of public policy. Welfare economics includes efforts to establish a minimum quality of living expectation within an area including access to commonly required services and the availability of living-wage jobs or affordable housing.

Welfare economics works in contrast to capitalist ideals. Government intervention regarding economic matters is fully rejected in pure capitalism. Focus is instead put in individual choice, accomplishment and development, as well as the pursuit of personal wealth. The theory behind capitalism supports that the society will experience an associated benefit through the pursuit of personal wealth.

Welfare Economics and Utility

"Utility" refers to the perceived value associated with a particular good or service. The perceived value is intrinsic and relates to whether a buyer feels the amount of value received for a certain good or service is at least equal to or greater than the amount of funds required to purchase it. Additionally, it suggests that a certain unit of currency, such as a dollar, has the same perceived value to an individual as it does to a corporation, regardless of how the income amounts of each entity differ.

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