Page 363 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 1. Each person tries to fulfill his desires to maximum by sending on several objects and services.
2. There is also a belief that contentment derived from intra-personal and inter-personal form is
comparable.
3. It is assumed that rule of diminishing marginal utility of income is implemented. It means when
income increases, then the marginal utility of income decreases. As a result of this, with the use of
extra income, a poor person gains more than a rich person loss, if we assume the income to be equal
and that income is transferred from rich to poor.
4. Another belief is that “equal ability to achieve contentment” which is of the opinion that different
people achieve same satisfaction with same actual income.
Only if these beliefs are given, Pigou’s conditions of maximum social welfare can be fulfilled on the
basis of dual criterion.
Its criticisms—Although Pigou’s “The Economics of Welfare” is the first detailed analysis of economic
welfare still its social conditions have been criticized below:
1. The concept of Maximization is not clear: Pigou emphasizes on the maximization of welfare but he
does not specify the concept of maximization. His “maximization” is actually optimum. But this is a
fixed point which is not correct because optimum is not fixed. It increases with increase in national
income and decreases with decrease in national income.
2. Pigou measures the welfare with the numerical cardinal process: According to Pigou, welfare
is measured by utility or contentment. Social welfare is considered to be combination of personal
utilities of exchangeable commodities and services. Economists do not agree with this concept because
utilities cannot be measured quantitatively. This is the reason the modern economists measure the
utilities through the process of sequential ordinal process.

3. National income is not the correct criterion for social welfare: Pigou’s “social conditions” are linked
to national income. But estimating the national income is not an easy task. Then just by increasing the
national income does not increase the social welfare. It is possible that due to inflation, an increase in
national income may be visible and because of this the condition of the poor may worsen. Because of
these reasons, modern economists measure the welfare on the basis of “election” instead of national
income. For example, if any person elects A group of any commodity instead of B group then
undoubtedly he gets maximum utility and contentment from A group. Thus, there is an increase in
welfare.
4. According to Prof. Robins, the belief of “Equal Ability of Man” does not make the study of Pigou’s
concept of welfare complete: According to him, this belief is based on the principle of morality and
not on scientific demonstration; this is not the decision of value.
5. Pigou does not clarify the morality aspect of welfare: The welfare economics is strongly related
to ethics. But Pigou does not clarify it. The welfare economics is necessarily an idealist study
in which valuable decisions and interpersonal comparisons are made. As Pigou does not relate
these concepts with his “welfare” concepts, his “welfare economics” cannot be considered as
actual study for welfare.
Due to these drawbacks, modern economists have formulated the thoughts of “amendment principle”
and “social welfare function” which is an effort to give a new face to social economics.

In a society, social welfare is considered as a congregation of the welfare of all people.

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