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  • Print publication year: 2005
  • Online publication date: June 2012

16 - Welfare Economics: The Market and the State



The book to this point has dealt mainly with economics as a positive science. It analyzed how the market economy works, whether or not the outcomes are regarded as desirable. But economists also study normative issues – public policy. Are price controls wise? Should immigration be limited? Are low taxes with small government better than high taxes with big government? Are regulations to protect the environment a good idea?

What economists call welfare economics, the subject of this chapter, asks how public policies should be evaluated. Such an evaluation will of course depend upon the goals of policy, especially the need to balance between efficiency and equity, discussed in the first section of the chapter. The second section reviews the Theorem of the Invisible Hand, a proposition suggesting that the market economy may achieve efficiency. The section that follows covers “market failures” – ways in which the Invisible Hand might go wrong. Two related areas of possible failure, the commons and the problem of public goods, are treated next. It turns out that these failures stem from unsuitable or incomplete assignment of property rights. The next main section therefore deals with attempts to acquire property rights over resources or to defend against others' efforts to gain such control.