this is organizational behaveiour

1. Chapter 1
Introduction to Welfare Economics
Welfare Economics for MSc PPM Students

2. 2
Background of Welfare Economics
 Governments must make decisions regarding the
adoption of public policies and projects.
 Suppose you are asked to provide expert testimony
to a congressional committee regarding these
policies.
 Which, if any, policy would you support?
 What would be the economic basis for your
testimony?
 Is there an objective theoretical justification for
either policy?
 How would you go about calculating the expected
gains and losses from these proposed policies?
 One must bear in mind that public officials must and
will make these decisions whether or not they can
get objective advice.

3. 3
What is Welfare Economics?
Definitions of Welfare Economics
 Welfare economics is the branch of economics that
deals with how to evaluate proposed
policies/projects.
 It deals with how to use resources optimally to
achieve the maximum well-being for individuals in
society or more simply to help society make better
choices.
 “Welfare economics is the study of how the
allocation of resources affects economic well-being”
(Mankiw, 2004, p. 138).

4. 4
Positive vs Normative Economics
 Positive economics is that branch of economics
that is concerned with understanding and predicting
economic behavior.
 Positive economics is only concerned with what ‘is’.
- What determines the prices of houses, farmland, or
- What will happen to the output of a competitive firm
when a tax is imposed on each unit of its product?
 These are the types of questions that positive
economics tries to answer.

5. 5
Positive vs Normative Economics
 Welfare economics, on the other hand, is concerned
with what ‘ought’ to be.
 Welfare economics is normative economics.
 Welfare economics focuses on using resources
optimally to achieve the maximum well-being for the
individuals in society.
 But, unfortunately, agreement cannot always be
reached on what is optimal.

6. 6
Efficiency and Equity
 Almost without exception, the great works in
economics have focused on some aspect of the
operation of the economy in terms of such criteria as
efficiency and equity.
 Economic efficiency has to do with producing and
facilitating as much consumption as possible with
available resources, whereas equity has to do with
how equitably goods are distributed among
individuals.
 Do competitive markets lead to the most preferable
state of society?
 What are the distributional effects of imperfect
competition and monopoly power?
 These are some of the fundamental questions of
efficiency and equity that can be addressed with
welfare economics.

7. 7
Decision Making Units and Their Primary Objectives
 In a certain economy, there are three decision
making units
1. Consumers: Maximize Utility
2. Producers:
a) The traditional economic theory
 maximize profits
b) The modern theories of the firm,
 Satisfying Behaviour
3. Government: Public welfare maximizer