WELFARE ECONOMICS:MEANING,PARETO’S

OPTIMALITY
 WELFARE ECONOMICS

A branch of economics that focuses on

the optimal allocation of resources and goods and
how this affects social welfare.
Welfare economics analyzes the total
good or welfare that is achieved at a current state
as well as how it is distributed.
Welfare economics is a subjective study
that may assign units of welfare or utility in order
to create models that measure the improvements
to individuals based on their personal scales.
 Prof. Baumol states that, “Welfare Economics has
concerned itself mostly with policy issues which arise out of
the allocation of resources, with the distribution of inputs
among the various commodities and the distribution of
commodities among various consumers.”
And it may be emphasised again that allocation
of resources is efficient or optimum when social welfare is
maximum.
Economists use a criterion known as
Pareto- optimality criterion for evaluating whether social
welfare increases or decreases as a result of a specific
change in economic state.
 PARETO’S OPTIMALITY

Pareto efficiency, or Pareto optimality, is a state of

allocation of resources in which it is impossible to make any
one individual better off without making at least one
individual worse off.
The term is named after Vilfredo Pareto (1848–
1923), an
Italian economist who used the concept in his studies
of economic efficiency and income distribution. The
concept has applications in the life sciences.
 An economy is in a Pareto Optimal state when no
further changes in the economy can make one person better
off without at the same time making another worse off.
Eg: When there are two individuals, one with a loaf of
bread and the other with a block of cheese, both can be
made better off by exchanging the bread for cheese.

A Weak Pareto efficiency is the result of a change

that makes at least one party better off, and does not make
any party worse off.
A strong Pareto efficiency is the
result of a change
in allocation in which all dimensions gain.
In curve below a move from B to C, A to B, A to D, causes a weak
Pareto efficiency. In curve below a move from A to C, or from A
to any point on CD causes a strong Pareto efficiency. In the curve
below, for A, BC is Weak Pareto Optimal and CD is strong Pareto
optimal.
 PARETO IMPROVEMENT

A Pareto improvement is said to have taken place

if a change is made in the distribution of goods or resources
that results in at least one individual being better off than
before the change while not making any other individual
worse.
Pareto optimality is to described as any state
where no Pareto improvement is possible. This effectively
means that it is impossible to improve the condition of any
single individual without harming the condition of another
individual.
THANK
YOU…