Welfare economics

Government policy is a frequent topic in welfare economics.

Economics is both a positive science and a normative science. Economics as a positive science studies how markets and economies work, regardless of whether or not those institutions produce a desirable result. Welfare economics is the normative study of the types of outcomes that an economic system should be producing, and whether or not those outcomes are being produced.

Economics as a normative science

As a normative science, welfare economics is the study of what kinds of things an economy should produce. This can be a particularly contentious topic as there is not a universal consensus on what those goals should be. The two most frequently discussed objectives are equity and efficiency. At its core, welfare economics can be thought of as a study of the tradeoff between these two goals.

Efficiency and equity are frequently in conflict because efficiency drives economic growth which increases the total quantity of resources available within a society, whereas equity can only re-allocate the distribution of a fixed set of resources. Welfare economics studies how this tradeoff is effected by different policies, and the acceptability of those policies to the participants of an economic system.

Equity

Equity in economics, represents how evenly resources are distributed within a society. In economics, equity usually refers to equality of outcomes rather than equality of opportunity. More specifically, economic systems which focus on equity implement policies that transfer resources from wealthier individuals to those with lower incomes. The moral justification for equity as an economic goal is the diminishing marginal utility of wealth, which is the notion that a poor person receiving a wealth transfer from a government program will experience a greater positive change in utility than the corresponding loss of utility associated with the tax to pay for the government program.

Efficiency

The goal of economic efficiency is to reduce the transactions costs associated with redistributive economic policy and the distortion of incentives that occurs as a result of some kinds of taxation. A good example of this kind of distortion of incentives would be a progressive income tax that takes more money as personal income increases. If an individual chooses to work less under the income tax than he would otherwise do so, the output he would have produced with his labor as well as the utility he would have derived from his wages are both foregone as a deadweight loss.