The branch of economics setting out the rules for maximizing the welfare of society by considering both the size of SOCIAL WELFARE and its distribution. As normative issues are its concern this is one of the most abstract and theoretical branches of economic science. The subject has advanced much from PIGOU’SEconomics of Welfare (1919) that defined economic welfare as ‘that part of social welfare that can be brought directly or indirectly into relation with the measuring-rod of money’ and then examined the relationship between private and social products, discussed PARETO OPTIMALITY and considered in detail welfare problems raised by monopoly and wages. As so many attempts are made to increase social welfare through income redistribution, it was inevitable that the principles for compensation were rigorously discussed—particularly in the KALDOR-HICKS compensation principle, the SCITOVSKY reversal test and in Rawls’s MAXIMIN principle.
Other approaches include the attempt to devise a SOCIAL WELFARE FUNCTION, seemingly sunk by ARROW’S IMPOSSIBILITY THEOREM and the general theory of the SECOND BEST. Despite so many false theoretical starts, welfare economics has inspired a great number of empirical studies, some using cost-benefit analysis, in matters as diverse as health, transport and energy economics.
