Welfare economics (a course this semester) is the study of how to allocate resources to maximize the social welfare of a community. This field started in about 1900 with a famous Italian named Vilfredo Pareto, who came up with the criteria for reaching 'Pareto Optimality.' This is one of the first and most common methods of reaching a point of maximum social welfare for a community which would indicate how these resources (tax breaks, subsidies, public goods) should be allocated. While his work was progressive and original for at the time of writing, his theory on this equilibrium has the problem of being unrealistic and uninformative for policy.
This problem is that the goal of this method of measuring social welfare (as expanded by Arrow and Debreu, among others) was to make welfare economics a positive science, that is, one without any value judgement. One requirement for Pareto Optimality (PO) is that there are no interpersonal utility comparisons. What is an interpersonal utility comparison, you may ask? Well, it is that simple thing you learned when you were 7 years old: put yourself in someone else's shoes.
Every person has a theoretical utility function (sort of like a personal function of happiness), that when maximized, indicates that my demands have been met. Pareto Optimality is theoretically reached when all the aggregate utility functions have been maximized, but without any regard distribution of resources. This means, I could get all the resources and my brother get none. The assumption that we do not compare utility functions implies that I will not consider the welfare (or resources) of another person. That the comparison of my own welfare, sitting in my sunny room on my computer, is incomparable to a person in Haiti who struggles find enough to eat. The idea is that I will never care and that any government (or resource-sharing-decider) should not care about comparing utility.
Value judgements (my situation is better than yours) have been avoided, but what exactly does this positive science achieve? Policies that lack an ability to make the most obvious of comparisons are more unrealistic than informative.
This problem is that the goal of this method of measuring social welfare (as expanded by Arrow and Debreu, among others) was to make welfare economics a positive science, that is, one without any value judgement. One requirement for Pareto Optimality (PO) is that there are no interpersonal utility comparisons. What is an interpersonal utility comparison, you may ask? Well, it is that simple thing you learned when you were 7 years old: put yourself in someone else's shoes.
Every person has a theoretical utility function (sort of like a personal function of happiness), that when maximized, indicates that my demands have been met. Pareto Optimality is theoretically reached when all the aggregate utility functions have been maximized, but without any regard distribution of resources. This means, I could get all the resources and my brother get none. The assumption that we do not compare utility functions implies that I will not consider the welfare (or resources) of another person. That the comparison of my own welfare, sitting in my sunny room on my computer, is incomparable to a person in Haiti who struggles find enough to eat. The idea is that I will never care and that any government (or resource-sharing-decider) should not care about comparing utility.
Value judgements (my situation is better than yours) have been avoided, but what exactly does this positive science achieve? Policies that lack an ability to make the most obvious of comparisons are more unrealistic than informative.
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