What is Welfare Economics?

A branch of economics that measures well-being and quality of living standards in an economy. Welfare economics uses an array of indicators to determine the prosperity in an economy. This includes GDP per capita, literacy, pollution etc. The most widely used index for welfare economics is real income and real GDP, if these increase it is recognised that the quality of living has improved.

Although the previous indicators may be the most usual, they do have many drawbacks and limitations. They fail to explain niche areas of living standards which enables the introduction of many other indicators. Examples of these include health car and congestion. It is important to use a variety of indexes when determining welfare to build up a wider picture with a larger data set to express well-being.

There are 9 main factors of Economic Welfare (Social and Socioeconomic)

1. Real income — Higher incomes increase potential consumption, therefore expanding utility.
2. Employment prospects — Unemployment decreases economic welfare as incomes and consequently consumption falls.
3. Job satisfaction —Lower satisfaction decreases mental health
4. Housing —Economic wealth is low when incomes are high but housing is unaffordable. However, good and cheap housing essential to economic welfare.
5. Education — Enables a more prosperous future
6. Life expectancy and quality of life — Health care increases wealth benefitting the unwell and disabled
7. Happiness levels — Normative judgments on people’s happiness
8. Environment — Pollution is undesirable therefore decreasing welfare
9. Leisure time — high wages due to working very long hours diminishes economic welfare. Leisure has economic value.

Utility

The happiness or satisfaction gained from the consumption of a good/service is defined as utility. All consumers are perceived to be utility maximisers, therefore they purchase items that will best increase their satisfaction. This links to economic welfare as satisfaction increases the quality of living.

An example of consumers maximising utility is: Choosing RyanAir over British Airways. A consumer may choose RyanAir when making a rational decision as the service is cheap which will attract consumers. Therefore, utility will be high as prices are low so consumers will choose Ryanair over perhaps, British Airways as they are getting the same service for a cheaper price. They maximise utility by choosing the cheapest flight. British Airways may not be efficient in supplies consumers will sufficient satisfaction for the price it is sold at.