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Welfare Criteria

 Welfare Criteria

The Paretian Criterion

            Pareto was the first economist to find out an objective test of social welfare maximum. Often Pareto optimality, Pareto unanimity rule, Paretian optimum, social or general optimum, the Paretian Criterion states that welfare is said to increase or decrease if atleast one person is made better off or worse off with no change in the positions of others.

            In other words: Any change which harms no one and which makes some people better off in their own estimation must be considered to be an improvement. Given certain rules of distribution any economic reorganisation is said to increase social welfare, if the welfare of some persons is increased without any decrease in the welfare of others.

            In terms of indifference curve analysis, an optimum position is one in which it is not possible to put any person on a higher indifference curve without causing someone to drop to a lower one. By defining a welfare position in terms of ordinal utility, Pareto rejected the notion of comparison of utility. This is explained with an illustration.
                                   

            Suppose there are two commodities A and B sharing a given bundle of good X. A’s utility is represented on the horizontal axis and B’s utility on the vertical axis. Thus BA represents utility represents utility possibility curve of all combinations of the individual utilities. The Paretian criterion shows that any change which causes a movement from C to F on the production possibility curve BA is an improvement because it makes both individuals better off thereby maximising their welfares.

            Likewise, a movement from C to D or E on the BA curve is an improvement for it makes at least one person better off without making the other worse off. But any point outside the segment DE is not a Pareto improvement. For instance, any movement from C to H increases B’s welfare at the expense of A’s welfare.

Its Criticisms

The Pareto criterion, as pointed out by Dr. Graaf, is free from making any interpersonal comparisons. It is based on a very broad ethical positive view that ‘one should always do good to all.’

  1. There can be an infinite number of Paretian Optima – Each with a different level of welfare. As pointed out by Pareto himself, there are an “infinite number of points at which maxima of individual optimalities are attained.” This criterion ex-plans little or nothing as to how it can be determined whether one optimum position is better or worse than another optimum position. If one were to choose the highest peak, it involves interpersonal comparisons. It is therefore not possible to find out the best of the optimum points of welfare.
  1. Not possible to Judge Many policy proposals – There are many policy proposals which cannot be judged with the help of this criterion. It does not apply to any policy proposal which benefits some and harm others. According to Baumol, “The Pareto criterion works by side stepping the crucial issue of interpersonal comparison and income distribution that is, by dealing only with cases where no one is harmed so that the problem does not arise.”
  1. The Paretian Criterion is not free from value judgements – To say that is possible to make every person better off without making any other person worse off is a value judgement in itself. Though Pareto used the method of ordinal measurement of utility, yet he could not present a value free criterion.
  1. Pareto evaluates only unambiguous changes in welfare – In his efforts to avoid interpersonal comparisons, Pareto evaluates only unambiguous changes in welfare. The Paretian welfare criterion is thus, of little use in making policy recommendations. For instance, in terms of the above diagram, a movement from C to any point on the segment DE is not always an unambiguous increase in welfare. There may be other optimum welfare positions on the utility possibility curve BA outside DE.

Conclusion

Barone in his effort to make the Paretian criterion realistic introduced the idea of a compensating payment. According to him, a change that makes one person better off and other worse off can lead to his economic welfare, if the gainer compensates the loser so that each returns to his original welfare position. But neither Barone nor Kaldor and Hicks after him, insisted on making actual payments. Scitovsky did suggest compensating payments being made actually. But all these efforts have not helped the welfare economists in evaluating policy changes on purely positive premises contrary to the Paretian criterion.

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