The preceding two chapters have been concerned with the analysis and measurement of the welfare of individual households. We now turn to questions of the welfare of society as a whole. The two topics which make up the title of this chapter are both major fields of economic investigation in their own right, and we cannot hope to give more than an outline of them here. Indeed, we are more concerned with illustrating one of the major themes of the book, that consumer theory as we have presented it is of great analytical value in other branches of economics. Social welfare functions have obvious conceptual links with individual utility functions and we shall explore these ideas in §9.1. We shall use our previous analysis to discuss possible structures for social welfare functions, and we shall argue that the index number concepts discussed in Chapters 7 and 8 can be used to provide natural units for making interpersonal comparisons of welfare. Section 9.2 is concerned with the measurement of inequality. The approach described is based on an explicit link with social welfare, pioneered by Kolm (1969, 1976) and Atkinson (1970), and we show how the analysis of §9.1 can be used to adapt the conventional measurement of income inequality to the more fundamental purpose of measuring welfare inequality.

Social welfare functions and their arguments

The social welfare function is an essential tool of welfare analysis and this section is concerned with its development and its properties. It will be used in §9.2 in specific practical contexts.