Welfare Economics

Reviewed by Sweta | Updated on Jul 30, 2021



Welfare economics refers to the allocation of goods and resources for promoting social welfare. It deals with an economically efficient distribution of resources for the well being of the people. Welfare economists seek to guide the public policy such that the distribution is economically and socially beneficial for all sections of the society.

Meaning of Welfare Economics

Welfare economics is a branch of economics which deals with the study of the structure of the economy, the markets comprised therein, to achieve an efficient allocation of goods and resources in the society.

The aim of welfare economics is the overall well-being of society. Hence, welfare economics involves an evaluation of the economic policies, guiding the public policies for the greater good of society. The study of welfare economics uses the tools of cost-benefit analysis and social welfare functions.

The underlying assumptions of the study are measurability and comparability of social welfare across various sections of society and ethical and philosophical considerations about social well being.

It involves the application of utility theory in economics. Utility refers to the value perceived by the society of the goods and services offered to the society. In the utility theory, consumers will seek to maximise their utility in their actions as buyers with sellers through the laws of demand and supply.

There are various criteria to measure whether the welfare gains arising from a change to the economy would outweigh the losses if any. When analysed in terms of Pareto efficiency, resources cannot be allocated to make one individual better off without making one or more individual worse off. The underlying assumption for this cost-benefit analysis is that utility gains and losses can be measured in terms of money.


Welfare economics seeks to achieve a state that will maximise the overall satisfaction for a society, maximising the producer and consumer surplus for the various markets comprised in the society.

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