Page 375 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 1. No relation to practical policy: Dr. Little comprehends it as impractical in totalitarian state and it is
also the more impractical in democratic state “where there are many faded social welfare functions as
per their member. It can be accepted as essential formal factor for a general independent adjustment
of the welfare which has no relation with the practical policy.”
2. Difficult to construct social welfare function: One more difficulty arises in the construction and
shape of welfare function. On adding the preference of each individual, social welfare function is
constructed. But the problem is individual preference should be given equal weight of different. It
makes a hard talk to create a social welfare function.
3. Equations and curves arbitrary and imaginary: Representation social welfare function in equations
or social indifference curves does not help in solving the problem as individual welfare function
cannot be estimated. Thus all the equations and curves representing social function are arbitrary
and imaginary.
4. Without empirical significance: According to Dr. Little the concept of maximum is without any
possible empirical significance, so it would be better not to use it at all. It is more meaningful to
derive the optimum conditions in adequate state without trying to define a maximum situation.
5. Not possible to construct social welfare faction based on individual preferences: Prof. Arrow
described that if individuals has to choose from two or more alternatives then constructing social
welfare function, the basis of ordinal member presence had to mutually oppose results. Suppose there
are three persons, A, B, C, who are to choose from these possible social situations X, Y, Z members
1,2, 3. The obtained statistics are shown in Table 25.1. A will give preference to X as compared
to Y, and to Y than Z, so he gives more preference to Z in comparison to X. B prefers Y than Z, Z
than X and so Y is preferred more than X. C prefers Z than X, Y so prefers Z in comparison to Y. If
individual preferences are given equal significance, then on the basis of majority rule, social function
can be constructed. But majority rule leads to mutually opposing results. Two person (A and C) give
preference to X more than Y and two persons (B and C) give more presence to Z than X. It clarifies
the paradox of majority rule, which according to Prof. Arrow is deadlock and so creates undesired
inaction in respect to socialization. Thus, the creation of a social welfare function is not possible, which
considers preferences of every individual.
6. Not helpful in solving the main problems of welfare economics: According to Prof. Baumol, “social
welfare function does not come and equipped with that kind of instructions, which is required for
it.” Thus, the welfare is not very helpful to solve the main problems of economics.

Self Assessment

State whether the following statements are True/False:
8. As per Dr. Little opinion, “The welfare completes the formal mathematical task of economics.”
9. One more difficulty arises in the construction and shape of creation of welfare function.
10. Incorporating social welfare function can remove the uncertainty found in Pareto Optimum.

25.2 Summary

• Social welfare fuction represents those factiors on which welfare of a society is assumed to be
dependent. Accoding to the definitions given by Bergson, it is “either the fucntion of welfare of
each individual of the community, or the fuction of goods consumed and the services rendered by
each individual of the community.”

368 LOVELY PROFESSIONAL UNIVERSITY