This chapter represents an exploration of a more inclusive welfare economics of taxation. Its nature, like that of any new enterprise, is of necessity somewhat tentative. The emphasis is on presenting an outline of ideas and illustrating them with relevant examples. Whereas some sections develop a formal analysis, others take a more intuitive approach. The organization of the material is based on the conclusions reached in the preceding chapter, where we sketched three steps required for a comprehensive welfare analysis in the presence of collective choice. (See Section 5.3.)

We begin here with the selection of the standard of reference against which to judge collective choice outcomes. This, together with a consideration of the conditions under which equilibrium policy outcomes will achieve the standard, constitutes the first step. Economists have devoted much effort to working out such an analysis for an economy with private markets, and it has been one of the important achievements of the discipline to show that an economic system with competitive markets will yield optimal (Pareto-efficient) outcomes under carefully defined conditions.