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  • Print publication year: 2012
  • Online publication date: December 2012

7 - Welfare Economics 2: The Many-Person Case

from Part I - Theory of the Consumer

Summary

Introduction

Most of the last chapter was about the well-being of a one-person society. It is appropriate to model society as having just one person (our Ms. Typical) if, for example, we want to decide between alternative tax policies that impact a homogeneous population (made up of many Ms. Typicals) in a uniform fashion. However, if people are very different (with different preferences and income levels, for instance), and are differently affected by any particular policy choice, it may be wrong to model society this way.

In this chapter, we assume that there are two or more people. How do we determine whether policy A is better than policy B if various people are affected by those policies, in various different ways? This is the crucial problem we now face. We touched on this problem in Section 6.5, but now we explore it further.

We know from Chapter 2 that utility is an ordinal measure, so it probably makes no sense to add together the utility levels of two or more people to get a social utility measure. However, if this is so, is it possible to judge alternative government policies, institutions, or market structures by adding together numbers that in some way represent individual assessments of those alternatives?

Economists use the idea of consumers' surplus to do this, and we explore consumers' surplus in this chapter. We start off by quickly revisiting problematic Examples 1 and 2 from the last chapter, and then we introduce an assumption, called quasilinear preferences or quasilinearity, that rules them out.

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