Economics and Ethics

Welfare economics: inverstigation of methods to obtain a social ordering over possible states of the world based only on utility information

social ordering: comparison of all states of the world that permits one to rankeach one as "better than", ,"worse than" or "equally good as" as every other --> implies moral judgements!

state of the world: a complete description of variables of interest

welfare economics assumes welfarism: one need only information about individual utility

utility functions assign numbers to states (allocations of goods or money)

two ways of interpretation:
1. cardinal: mnumerical differences in utility matter
2. ordinal: only order or ranking of states matter

Interpersonal comparability of utilities: Needed to max. total utility
Cardinal utility: needed to rank different states across individuals

Economists prefer weaker assumption:
Avoid interpersonal comparison
Prefer ordinal over cardinal utility

Efficiency requires only ordinal utility

efficiency involve two additional value judgements
1. Individualism: preference satisfaction: social orderings should be based on individual orderings / raionality
2. pareto principle

Weak informational requirements
-only an ordinal ranking of individual preferences over states of the world is required
-interpersonal comparison of utility are also not necessary

The pareto criterion liberated normatve economics from utilitarianism

1. pareto optimum is not unique

2. Incompletness of pareto principle: cannot rank all states, even some efficient states over inefficient

3. strong ethical assumptions: indifference to distributional issues; conservations of no-harm principle

4. relevance; few real world situations with no losers

Partial equilibrium analysis: studies individual markets
Genreal equilibrium analysis: studies all markets and agents in the economy simutaneously
Pure exchange economy: no production
Standard preferences: indifference curves are non-intersecting, negativley sloped, dense, convex and monotonic
 

a change that makes at least one person better off without making anyone lese worse off

a state which: No pareto improvements are possible, no can be made better off without making someone else worse off

a state s is better than a state t, if, in state s, it is hypothetically possible to undertake costless redistribution to a state that is pareto superior to t

Result: The compensation principle always ranks any pareto optimum superior to any insufficient allocation

1. Complete ordering
2. Not conservative: all pareto efficient states are preferred
3. Relevance: loosers allowed

1. Optimum still not necessarily unique
2. Relevance: transfers not usually costless
3. strong ethical assumption: indifference to distributional issues

Efficiency rests on: Weak information requirements, welfarism

Critiques of welfarism: Utility does ot represent well-being, well-being might be pluralistic and not comparable

fairness or justice: are these fair and efficient solutions? Does justice belong to a different category of morality?