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Unit-24: Pigovian Welfare Economics and Externalities

24.1 Concept of Welfare Notes

According to Pigou, welfare exists in the mind and conscience of a person which is made out of his/
her needs and utilities. Thus, the extent to which a person’s needs are fulfilled is necessarily the base of
his/her welfare. In a society, social welfare is considered to be the central point of the welfare of all the
people. As general welfare is a detailed, critical and an unusual concept, therefore, Pigou has limited
his study to economic welfare only. He says that economic welfare is not an indication for total welfare
because several elements of total welfare such as the value of work, environment of a person, human
relations, post, residence, government security, etc. do not exist today in economic welfare. Therefore,
he considers economic welfare as that part of social (general) welfare which in a direct or indirect way
it is addressed as the criterion of currency. Therefore, according to Pigou the concept of welfare is the
satisfaction or use of products or services of a human being.

Self Assessment

Fill in the blanks:
1. The Economics of Welfare written by Professor ......................... is the first recognized epic on welfare
economics.
2. Welfare economics was started by Pigou. Prior to that ......................... economics existed.
3. According to Pigou, ......................... exists in the mind and conscience of a person.

24.2 Pigovian Welfare Conditions

Pigou considers welfare and national income as, necessarily, co-ordinate. On the basis of this, he fixes
two conditions to maximize the welfare.
First, the first condition specifies that when there is an increase in national income. There is an increase
in welfare. If tastes and income distribution are given, the increase in national income represents the
increase in welfare. According to Pigou, in most of the situations there will be increase in national
income if there is an increase in the disutility of the work.
Second, to maximize the welfare, distribution of national income is essential. If the national income
remains stable then the transfer of income from rich to poor will further the welfare. According to
Pigou, such transfers have less impact on rich than on poor, as a result of which the economic condition
of the poor improves. This welfare condition is based on Pigou’s dual concepts “equal capacity for
satisfaction” and “Diminishing marginal utility of income”. Pigou argues that different people
obtain equal satisfaction from the same real income and those who are now rich are different from
those, in nature, who are now poor as the rich have more probability of consumption than poor. On
implementing the rules of utility, transferring the income from rich to poor, by controlling the less
immediate necessities of rich to fulfill the more immediate necessities of poor, the social welfare is
increased. Thus, only economic equality can maximize welfare.
Dual criterion—To understand the progress in social welfare, Pigou adopts a dual criterion.
First, increase in national income or increasing some commodities without increasing some other
commodities or shifting some resources for such activities, where their social relevance is maximum, is
considered as a development in welfare provided there is no scarcity among the poor.
Second, any step in economics which increases the share of the poor without reducing the national
income is considered a development in social welfare.
Assumptions of Pigovian Conditions—Pigovian conditions of welfare and dual criterion are based on
following beliefs. Some of which have been already indicated.

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