Principles Of Welfare Economics Research Articles

Transactional fairness in consumer markets

Abstract There is growing public concern about the ‘unfairness’ of many pricing practices that have become common in consumer, particularly digital, markets. Industrial and behavioural economists have developed theories that explain the conditions under which these practices are profitable for firms, and their implications for consumer welfare. We identify a mismatch between the welfare economic principles used in this theoretical work and the normative perspective in which these practices are viewed as unfair. We develop a concept of ‘transactional fairness’, grounded in the normative approach of Sugden's Community of Advantage, that is reflective of public concerns. Transactional fairness is complementary to established criteria of economic efficiency and distributional equity but is based entirely on the relationship between individual buyers and sellers. It establishes clear principles with realistic information requirements that are appropriate for compliance by firms. Regulation based on this approach can help to restore public faith in markets.

Analyzing congestion surplus distribution based on social welfare optimization

The distribution of congestion surplus affects not only the short-term economic interests of stakeholders in the power spot market, but the improvement of social welfare in the long run. At present, the congestion surplus in mature electricity spot markets of developed countries is usually returned to the power users or power generation enterprises according to established proportions. Although this method helps achieve rational distribution of congestion surplus, it does not offer a solution to the congestion problem and cannot achieve maximized social welfare. In light of the principles of welfare economics, we propose in this paper injecting the congestion surplus into the capital pool of the power grid as a transmission line expansion fund to fundamentally solve the power transmission congestion problem. Modeling results and case studies presented in our work verified that our proposed distribution model could achieve Pareto optimization. Finally, combining the power transmission and distribution (PTD) pricing and supervision method, this paper puts forward the method for use and supervision of congestion surplus on the power spot market to reach optimal allocation of resources.

Comparing the Noncomparable: The Need for Equivalence Measures That Make Sense in Health-Economic Evaluations

BackgroundThe popularity of quality-adjusted life years (QALYs) has been resistant to concerns about validity and reliability. Utility-theoretic outcome equivalents are widely used in other areas of applied economics. Equivalence values can be derived for time, money, risk, and other metrics. These equivalence measures preserve all available information about individual preferences and are valid measures of individual welfare changes. ObjectiveThe objective of this study was to derive alternative generalized equivalence measures from first principles and illustrate their application in an empirical comparative-effectiveness example. MethodsWe specify a general-equilibrium model incorporating neoclassical utility functions, health production function, severity-duration preferences, and labor-market tradeoff function. The empirical implementation takes advantage of discrete-choice experiment methods that are widely accepted in other areas of applied economics and increasingly in health economics. We illustrate the practical significance of restrictive QALY assumptions using comparative-effectiveness results based on both QALYs and estimates of welfare-theoretic time-equivalent values for anti-tumor necrosis factor and prolonged corticosteroid treatments for Crohn’s disease in three distinct preference classes. ResultsThe QALY difference between the two treatments is 0.2 months, while time-equivalent values range between 0.5 and 1.3 months for aggregate and class-specific differences. Thus, the QALY-based analysis understates welfare-theoretic values by 60%-85%. ConclusionThese results suggest that using disease-specific equivalence values offer a meaningful alternative to QALYs to compare global outcomes across treatments. The equivalence values approach is consistent with principles of welfare economics and offers several features not represented in QALYs, including accounting for preference nonlinearities in disease severity and duration, inclusion of preference-relevant nonclinical healthcare factors, representing preferences of clinically-relevant patient subpopulations, and including utility losses related to risk aversion.

Managing Water Scarcity at a River Basin Scale with Economic Instruments

This paper presents a conceptual framework for both assessing the role of economic instruments, and reshaping them in order to enhance their contribution to the goals of managing water scarcity. Water management problems stem from the mismatch between a multitude of individual decisions, on the one hand, and the current and projected status of water resources on the other. Economics can provide valuable incentives that drive individual decisions, and can design efficient instruments to address water governance problems in a context of conflicting interests and relevant transaction costs. Yet, instruments such as water pricing or trading are mostly based on general principles of welfare economics that are not readily applicable to assets as complex as water. A flaw in welfare economic approaches lies in the presumption that economic instruments may be good or bad on their own (e.g., finding the “right” price). This vision changes radically when we focus on the problem, instead of the instrument. In this paper, we examine how economic instruments to achieve welfare-enhancing water resource outcomes can realize their full potential in basin-scale management contexts. We follow a political economy perspective that views conflicts between public and private interest as the main instrumental challenge of water management. Our analysis allows us to better understand the critical importance of economic instruments for reconciling individual actions towards collective ambitions of water efficiency, equity and sustainability with lessons for later-adopting jurisdictions. Rather than providing panaceas, the successful design and implementation of economic instruments as key river basin management arrangements involves high transaction costs, wide institutional changes and collective action at different levels.

Welfare Effects of Water Pricing in Germany

The observed two-part tariff price structure (consisting of a lump-sum price and linear marginal price) for drinking water in Germany does not reflect the cost structure reported in the literature. Recovering marginal costs from a sample of 251 German counties, we see that there are positive price-cost margins, while lump-sum prices are too low. A price structure readjustment along welfare economic principles (marginal cost pricing, lump-sum price ensures cost-recovery) would increase the mean consumer surplus by 0.037% of the local GDP or €[Formula: see text]2.129 million per county, assuming a share of 15% variable costs in total costs.

Valuation of human health: An integrated model of willingness to pay for mortality and morbidity risk reductions

This paper develops and applies an integrated model of mortality and morbidity valuation that is consistent with the principles of welfare economics. To obtain the integrated model, the standard one-period expected utility model of one person facing the prospect of either being alive or dead is extended to incorporate (1) a third health state (sick) with a utility level that is intermediate to utility if healthy and utility if dead, (2) a family perspective in which a parent makes choices about risk exposure both for herself and for a child, and (3) a multi-period framework that allows for possible parent/child differences in illness latency. Monetary benefits of health risk reduction obtained from the integrated model are compared with those that would be computed using the standard model. The integrated model then is applied using data obtained from two field studies of skin cancer and leukemia to demonstrate how it can be used to estimate health benefits of reduced illness and death risks.

On the appropriate objective function for post-disaster humanitarian logistics models

The paper argues that welfare economic principles must be incorporated in post-disaster humanitarian logistic models to ensure delivery strategies that lead to the greatest good for the greatest number of people. The paper's analyses suggest the use of social costs—the summation of logistic and deprivation costs—as the preferred objective function for post-disaster humanitarian logistic models. The paper defines deprivation cost as the economic valuation of the human suffering associated with a lack of access to a good or service. The use of deprivation costs is evaluated with a review of the philosophy and the economic literature to identify proper foundations for their estimation; a comparison of different proxy approaches to consider human suffering (e.g., minimization of penalties or weight factors, penalties for late deliveries, equity constraints, unmet demands) and their implications; and an analysis of the impacts of errors in estimation. In its final sections, the paper conducts numerical experiments to illustrate the comparative impacts of using the proxy approaches suggested in the literature, and concludes with a discussion of key findings.

Panel data analysis of operating costs in the Norwegian car ferry industry

This article demonstrates that panel data estimation methods can be applied to derive operating costs for the highly regulated car ferry industry in Norway. The balanced data set includes 360 observations of ferry crossings from 1995 to 2005. Compared with cross-sectional results from earlier studies, the random effects (Generalized Least Squares) model applied in this article provides more efficient and unbiased cost estimates. With particular relevance for pricing according to the principles of welfare economics, our estimates indicate that previous studies have underestimated the marginal costs (MC) of transporting vehicles of different sizes. Moreover, the difference between fares and MC increases with distance. Hence, vehicles transported on longer trips are, in contrast to the welfare principles forming the basis for the current fare scheme, charged relatively more and, thus, subsidize the fares of vehicles transported on shorter trips.

COMMENTARY: Sports Broadcasting: Is it a Job for Public Service Broadcasters?-A Welfare Economic Perspective

The current policy of European public service broadcasters (PSBs) of acquiring expensive sports rights does not correspond with welfare economic principles. The Listed Events regulation prevents sports events of major importance for society from migrating to pay-TV broadcasters. Handing over expensive sports programs to commercial rivals will release resources that can be used on other activities, including programs that have characteristics of externalities and merit goods. Such a policy has been adopted by Australian PSBs.

Foundational principles of welfare economics underlying the life quality index for efficient risk management

The paper provides the philosophical foundation and clarifies the methodological assumptions that form the basis of the Life Quality Index (LQI) as an innovation to promote efficient risk management practices. The basic premise is that enhancement of life safety is a fundamental human value. The LQI draws into account key social indicators as identified in the UN Human Development Reports with significant emphasis on income and life expectancy. The paper shows that the LQI model is in harmony with well-established principles of welfare economics as highlighted in the literature on economics and human development. Furthermore, the derivation of the LQI is shown to be consistent with the key operational requirements of utility theory and econometric modelling. The LQI has potential to be an effective and versatile tool to support social and economic cost-benefit analysis of engineering projects that have consequential impacts on individual welfare and the quality of life.

IS INJURY COMPENSATION EXCESSIVE?

In Australia, excessive awards in personal damage cases are widely perceived to have created a public liability crisis and cuts in valued services. This paper analyses whether awards for damages are excessive. The paper starts by setting out a normative basis for awards based on welfare economic principles and amounts that individuals are willing to pay to avoid injuries. It then provides estimates of appropriate compensation sums for 27 typical injuries ranging from broken arms to quadriplegia and severe brain damage. There follows an analysis of 192 court awards for injuries greater than $250 000 in New South Wales between 1991 and 2002, including awards for 101 traffic accidents, 64 workers compensation cases, and 27 personal injury cases. The paper concludes that these court awards are broadly consistent with economic estimates for damages and that the awards are generally not excessive.

Canada Wide Standard for particulate matter and ozone: cost-benefit analysis using a Life Quality Index.

The adverse impacts of particulate air pollution and ground-level ozone on public health and the environment have motivated the development of Canada Wide Standards (CWS) on air quality. In cost-benefit analysis of air-quality options, valuation of reduction in mortality is a critical step as it accounts for almost 80% of the total benefits and any bias in its evaluation can significantly skew the outcome of the analysis. The overestimation of benefits is a source of concern since it has the potential of diverting valuable resources from other needs to support broader health care objectives, education, and social services that contribute to enhanced quality of life. We have developed a framework of reasoning for the assessment of risk-reduction initiatives that would support the public interest and enhance safety and quality of life. This article presents the Life Quality Index (LQI) as a tool to quantify the level of expenditure beyond which it is no longer justifiable to spend resources in the name of safety. It is shown that the LQI is a compound social indicator comprising societal wealth and longevity, and it is also equivalent to a utility function consistent with the basic principles of welfare economics and decision analysis. The LQI approach overcomes several shortcomings of the method used by the CWS Development Committee and provides guidance on the compliance costs that can be justified to meet the Standards.

Reconciling Cost—Benefit and Economic Impact Assessment for Event Tourism

Governments frequently justify their expenditure on underwriting the commercial viability of tourism events in terms of the economic impacts that the events bring to their host region. However, the justification for public expenditure in general is more usually based upon cost–benefit analysis, founded on the principles of welfare economics. It concentrates on consumer and producer surplus measures, with a particular emphasis on consumer surplus. In many cases the focus of special events is not on local consumers, but on attracting consumers from outside the region. In this case, producer surplus is the more appropriate focus. It generally assumes that resources are used at their opportunity cost. In contrast, economic impact analysis involves estimating the full value associated with the use of either labour or capital. This paper demonstrates that there is a potential correspondence between the welfare economics paradigm of cost–benefit analysis and the growth-based paradigm of economic impact. That link is based on an underlying presumption that resources are unused or underused, and therefore income generation is a real benefit.

Testing an Economic Approach to Resource Dilemmas

This article applies a market mechanism derived from principles of welfare economics to a social dilemma simulation in the laboratory. In Study 1, half of the five-person groups were offered the opportunity to voluntarily "buy-out" one or more group members in an effort to conserve a shared, scarce resource. Most groups offered the intervention achieved at least one member buy-out per game. Yet, despite the smaller size of the groups, these groups did not sustain the resource pool any longer than control groups that were left intact. In fact, the results were in the opposite direction. Subjects behaved in a more self-interested manner. In Study 2, the "buy-out" intervention was varied to test the robustness of Study 1′s result. It was found that the intervention was not sensitive to changes in the specifics of operationalization. Discussion is offered regarding the complexity of market-based interventions in social choice situations and the need for improved understanding of the micro-mediating links between market dynamics and individual- and group-level behavior.

Household and Economy: Welfare Economics of Endogenous Fertility.

This book is about socially optimal population size and the social consequences of individual choice with respect to family size within each generation; it examines the general equilibrium implications of endogenous fertility for a number of issues of population policy. Subject to whatever economic opportunities and constraints they face parents are assumed to maximize their own utility functions in making choices with respect to numbers of children and investments in them. Chapter 1 sets the context of the investigation; Chapters 2 and 3 review the basic principles of welfare economics and the economics of externalities; chapters 4 and 5 summarize the traditional theory of household behavior and its modification to cover parental decisions with respect to fertility and investments in children; chapter 6 discusses optimal population size according to various social welfare criteria; chapters 7 and 8 turn to real and potential externalities generated by the endogeneity of fertility; and chapter 9 explores the principal alternative reason for having children thought to be important in developing countries. The implications of endogenous fertility for within generation income distribution policies are explored. Overall this book should be useful in courses on welfare economics at the undergraduate level and more widely among other social social scientists concerned with population problems who have the equivalent technical background.

Making Economic Welfare Analysis Useful in the Policy Process: Implications of the Public Choice Literature

The major use of economic welfare analysis envisioned by its inventors and innovators was to offer guidance to policy makers. However, in spite of widespread advice by welfare economists, many major economic policies that are apparently contrary to accepted principles of welfare economics continue to be employed. As a result, a common view among economists is that policy process is often misguided. On other hand, those closer to policy process argue that (welfare) economists are misguided. For example, in agricultural policy, Cochrane argues that welfare measures derived from economist's model of perfect competition are irrelevant to actual policy issues. With this opinion expressed within policy circles, several questions must be raised. How can welfare economics be made relevant to actual policy issues? Why has welfare economics played a role in some policy issues and not in others? Do cases where principles of welfare economics are not followed represent a failing of policy process? Or do these cases represent a failing of economic analysis? Economists have acknowledged inapplicability of perfect competition model in several respects. For example, in agriculture, which is a fairly competitive sector, Brandow argues that the perfect competition model is far from duplicated in free markets, and its assumptions are breathtakingly heroic (p. 271). Nevertheless, competitive norm has continued to be an absolute measuring rod of performance. Is this practice warranted even when failure of assumptions is serious? Under what assumptions is standard of economic efficiency (defined by competitive norm) inappropriate? What standards are appropriate? This paper addresses some of these issues by drawing on public choice literature. This literature has its roots in welfare economics (Arrow, Buchanan and Tullock). However, public choice literature has diverged markedly from empirical economic welfare practices which yield advice usually offered to policy makers. In broad terms, empirical Marshallian welfare practices have followed a normative role of evaluating efficiency of alternative policies (suggesting at least implicitly that most efficient policy should be adopted or that a cost is incurred in not so doing). On other hand, much of public choice literature takes a more positive role of understanding how various policies are chosen and under what conditions those choice processes are appropriate. This is motivation for drawing on study of public choice to improve usefulness of economic welfare analysis in policy process.

The Economics of Environmental Quality.

An introduction to the economics of the environment, it provides a coherent chain of theoretical and empirical reasoning on environmental problems and measures to control them and reduce their severity. It equips the reader with the basic tools needed to assess the economic damage caused by materials discharged to air, water, and other environmental media. The all-new Chapter 2 in this edition makes the text more accessible by applying the basic elements of microeconomics analysis to environmental issues: supply and demand for ordinary and environmental goods, emphasizing both similarities and differences; also market failure, public goods, property rights, the free rider problem, and externalities. A section on hazardous substances has been added along with a discussion of the latest environmental alternative reforms. The book now ends with a new chapter on the prospects for environmental economics. In Part I, the authors establish a theoretical base for the material in subsequent sections. They review key elements of microeconomic theory and extend them to include polluting discharges. Principles of welfare economics, of market failure from externalities, and of benefit-cost analysis receive careful exposition. They are then applied to alternative government programs such as effluent fees, subsidies, and regulation designed to optimize resource allocation in the presence of externalities. Part II draws together technical data on water, air, and solid-waste discharges. Sources, amounts, damages, abatement techniques, and benefit-cost calculations are pollutants. The final section deals with pollution-control programs now in effect, proposals for new policies, and future role of environmental economics.

The Economics of Control. Principles of Welfare Economics

The Economics of Control. Principles of Welfare Economics

The Economics of Control: Principles of Welfare Economics. by Abba P. Lerner

The Economics of Control: Principles of Welfare Economics. by <i>Abba P. Lerner</i>

The Economics of Control: Principles of Welfare Economics

The Economics of Control: Principles of Welfare Economics