Introduction
The welfare of society is a core concern in public economics. The assertion that “the overall welfare of the society essentially depends on the individual utility level” reflects a foundational idea in welfare economics — that individual preferences and well-being are the building blocks of societal well-being. This response covers the various approaches to social welfare functions (SWFs), how public intervention addresses negative externalities, and the distinctions between individual and collective decision-making.
Approaches of Social Welfare Functions (SWFs)
A Social Welfare Function is a theoretical framework used to evaluate the overall well-being of a society based on individual utilities. Several approaches have been developed to represent different philosophical perspectives:
1. Utilitarian Approach
- Proposed by Jeremy Bentham and John Stuart Mill.
- SWF = U1 + U2 + … + Un
- The goal is to maximize the total or average utility of all individuals in society.
- Criticism: It can ignore inequality and distributional fairness.
2. Rawlsian (Maximin) Approach
- Based on the theory of justice by John Rawls.
- Focuses on the utility of the worst-off member of society.
- SWF = Min(U1, U2, …, Un)
- Emphasizes fairness and equality over total utility.
3. Bergson-Samuelson Social Welfare Function
- Allows explicit value judgments and reflects society’s preferences.
- Can be tailored to include concerns for inequality, efficiency, and fairness.
4. Sen’s Capability Approach
- Proposed by Amartya Sen.
- Focuses not just on utility, but on the capabilities (freedoms) individuals have to achieve well-being.
Public Intervention and Negative Externalities
Negative externalities arise when the consumption or production of a good imposes costs on third parties not reflected in market prices.
Examples:
- Pollution from factories harming nearby residents
- Second-hand smoke affecting non-smokers
Role of Public Intervention:
- Taxes: Pigovian taxes can be levied to internalize external costs (e.g., carbon tax).
- Regulations: Setting limits on pollution, emission standards, etc.
- Subsidies: For environmentally friendly alternatives (e.g., renewable energy).
- Property Rights: Assigning legal ownership can help address externalities (Coase Theorem).
Individual vs Collective Decision-Making
Individual Decision-Making: Decisions are made based on personal preferences, budget constraints, and individual utility maximization.
Collective Decision-Making: Involves public choice and is made on behalf of society through democratic or institutional processes (e.g., voting, legislation).
Key Differences:
| Aspect | Individual | Collective |
|---|---|---|
| Objective | Maximize personal utility | Maximize social welfare |
| Method | Market mechanisms | Democratic/political processes |
| Resource Allocation | Guided by price | Guided by policy and majority choice |
Example:
An individual may choose to buy a car for convenience, but at a societal level, policies may favor public transport to reduce congestion and pollution.
Ranking of Social States by Individuals
Individuals rank social states based on their personal utility functions. A social state that provides more personal utility is preferred over others.
- Ordinal preferences are used — individuals can rank options but may not quantify the difference in utility.
- Arrow’s Impossibility Theorem suggests difficulty in aggregating individual preferences into a collective decision that satisfies fairness criteria.
Conclusion
Social welfare functions provide frameworks to assess collective well-being from individual preferences. Public intervention is essential in cases of market failures like negative externalities to correct inefficiencies and promote social welfare. Additionally, collective decision-making is fundamentally different from individual choices, often involving compromises and societal goals. Together, these concepts form the foundation of modern public economics and policy design.