4 - The social welfare function in policy analysis

Abstract

This chapter presents a discussion on the social welfare function in policy analysis. The chapter focuses on the applications that are in the spirit of the “New, New Welfare Economics,” which employs flexible-form social welfare functions to highlight how ethical judgments ranging from the utilitarian to Rawlsian can instruct public policy. Because the analysis is first-best, the applications generally focus on the question of distributive justice without worrying about the inefficiencies that actual redistribution of income give rise to. It is also assumed that the pareto-optimal conditions are satisfied, unless specifically stated. The chapter describes the Atkinson social welfare and the distribution of income framework. Atkinson's desire to meld social welfare and the income data led him to specify the social welfare function in terms of income. Atkinson sought a very simple specification of W—one that could easily be applied to the income data and yet would capture the full range of ethical judgments from the utilitarian to Rawlsian. He achieved this with three highly simplified and heroic assumptions: the social welfare function is utilitarian, everyone has identical tastes, and utility exhibits diminishing private marginal utility of income. Atkinson's assumptions were widely adopted in applied social welfare analysis.