Economic welfare

The term economic welfare referred to in the economics an abstract construct for normative assessment of policy alternatives in the broadest sense. The economic welfare of an economy is basically formed by the aggregation of the benefits of single individuals. The economic welfare is the central concept of welfare economics.

Paradigm of welfare economics and thus a necessary component for understanding the economic welfare is the exchange. Two individuals with a given initial endowment of goods and preferences given voluntarily swap two different goods, because they prefer their goods equipment after the exchange. By definition, their utility has thus increased for both individuals; because of economic prosperity is formed via the aggregation of individual utility, so that the economic prosperity of the economy has increased.

The origin of the term is based on an erroneous translation of the English term "welfare ", which actually means " prosperity " in German. However, it remains the case that "welfare " is defined as a technical term in economics through comparison and exchange of goods bundles and not as a " psychological " wealth.

  • 5.1 Classification and conclusions on the external trade policy
  • 6.1 Classification and conclusions on competition policy

Economic welfare and perfect market

Imagine a perfect market for a good. Supply and demand curve intersect at a point, the equilibrium point, it forms an equilibrium price (price: Y- axis) and an equilibrium amount ( Quantity: X -axis) out. There are no other buyers who would buy at this price and no other providers that would offer at this price the asset. The area between a line parallel to the X axis running straight at the level of equilibrium price () and the demand curve (D ) is called consumer surplus (KR ), the area between this line and the supply curve (S ) is called producer surplus (PR ) refers. The sum of the two surfaces PR KR (ie, the area left of the equilibrium point between supply and demand curve ) is the total pension.

The so- reaching economic optimum can be determined regardless of how goods and income are distributed in economics ( Pareto optimality ). That purely formal can also be a very unjust and unequal distribution based on an economic optimum. Under certain conditions and assumptions of state farms and income can redistribute. The aim is ideally the transfer of one of the many conceivable economic optima in a social optimum. Among other such considerations provide economics justifications for the existence of the state and its intervention in economic affairs.

This microeconomic sound basic concept of the market economy is used to analyze the impact of activities of economic entities and the state and serves as a basis for economic science recommendations in the face of political decision options.

Welfare and welfare loss

Under a welfare loss (including net welfare loss allocation loss, additional burden of tax, tax wedge, dead- weight loss, excess burden, Harberger triangle) is understood in this context, caused by a disturbance of the market compared to the situation of perfect competition loss of consumer and producer surplus. The cause of the loss of welfare in each case that the counter ( = produce ) set of the Pareto- optimal set is different, which is established on a perfect competition market in balance.

Since you ( at least theoretically) can be calculated in terms of value the welfare loss, the cost of market interventions such as taxes, high prices, tariffs or market failure can be calculated ( eg, due to monopolistic structures or external effects).

Welfare losses can also occur due to externalities, that is, by such effects of the decisions of economic operators to other actors, the

  • Reduce the benefits of the other actors and
  • Not taken into account in deciding the economic operator were ( Mishan ).

Welfare losses are naturally found only partialanalytisch. That is, it can not be considered any impact on the consumption possibilities and utility level of the population ( as these in the future and can not be completely known ), but only a easy to determine, as deemed relevant subset. Such shortened calculations are inherently problematic.

Welfare gain

The welfare gain is the counterpart of the welfare loss. Welfare gains can be realized only in imperfect markets, as in perfect markets the maximum of the welfare has already been reached.

However, real markets are virtually never perfect. A welfare gain is, for example, according to the theory of foreign trade of the economist David Ricardo achieved by increased free trade, as this comparative advantage and thus economic welfare gain can be achieved. Under conditions that differ greatly from those of the perfect market, but it is difficult to prove that the welfare gains of free trade. The structuralist critique of free trade has about a situation in Latin America in the 19th and early 20th century out of mainly benefited a small elite of "free " export of raw materials.

Welfare effects of a tax

Now, if a tax introduced, so it is for their welfare effects no matter who has to pay this tax. In economic terms, the question depends on the tax incidence, so the question of who to what extent and in what proportion bears ( not who ) pays the tax only on the elasticities of supply and demand curve from.

The introduction of a tax has the following effect: buyers and sellers are facing various prices over because the seller only interested in what he (excluding tax =) gets, the net demanders only interested in what he has to pay gross ( tax included =). Thus, it comes through tax also to a volume effect. The quantity sold is compared to the equilibrium without taxes () on back.

The consumer surplus (KR ) is now reduced for two reasons:

The producer surplus (PR ) also decreases for two reasons:

The negative effects on consumer and producer surplus are at least partially offset by higher government revenues as a result of tax collection. The state flow while revenue in the amount of S. The most economic models assume that the state welfare enhancing uses this revenue elsewhere. Therefore, they are in the model part of the overall welfare. State Critical economists argue, however, that the state could use its income far less efficient than consumers and producers, which is why a perfect integration into the economic welfare in reality is questionable.

However, state does not flow to the entire reduction of producer and consumer surplus. On the goods that were traded prior to although tax collection, after taxation but not more (for the gross demand too expensive for providers to net favorable) (ie, on the difference between and ) no tax is levied. Only this fall in total surplus is called the deadweight loss or additional burden of taxation ( excess burden, deadweight loss of taxation or Harberger triangle ) denotes (ZL ). Formal: KR PR (excluding taxes) > KR PR S (with tax)

Classification and conclusions on the tax policy

Who has to pay a larger share of the tax burden depends on how elastic supply and demand. In a completely inelastic demand ( the demand for gasoline is ( short-term) very inelastic ), the producers almost completely pass on the tax burden. In an extremely elastic demand (food in Germany, see also discounters) the producers have to bear the tax burden largely self.

With only a low elasticity of demand, the additional burden of taxation is quite low, since the quantity sold goes back very little. Therefore, there is often the requirement that one should above all goods with a very inelastic demand tax ( cigarettes and other addictive substances, gasoline and the like). An interesting counter-argument is argued by representatives of the public choice theory: When different tax rates levied on different goods ( such as the reduced VAT rate of 7% instead of 19 % on certain goods, see Sales Tax ), then costs due to the additional lobbyists activity, since different industries will try to let tax their products as low as possible, while these costs are lower at a uniform rate.

More on tax benefits and disadvantages in the article control.

Welfare effects of an inch

The model of the welfare effect of a tax can be transferred as a whole and on the effects of an import duty. This is a tax on imported goods is more expensive and therefore the market price to the same extent as a control. Therefore, the model also comes here to the same conclusions: Import duties interfere with the free market process and therefore lead to additional loads.

Classification and conclusions on the external trade policy

The model shown represents the economic efficiency of an import duty principle in question. More detailed models show that the collection of customs duties, especially for large countries can be welfare -promoting anyway because they can pass on a portion of the burden on the foreign effects of price ( better terms of trade ). Collegiality.Notwithstanding of the critique remains beyond, for example, the imposition of a duty education.

Welfare effects of a monopoly

Net welfare losses arise also in the private sector by monopolies and oligopolies, as consumers are forced into a Monopolsitutation to pay prices that are above the competitive prices.

While the equilibrium in the Polypol at / is, a higher price () must be paid in monopoly case, which leads to a lower consumption rate ( ). The consumer surplus (KR ) is due to the price increase and the volume decreases significantly. On the producer surplus two opposite effects act: on the one hand, it goes back since the monopolist compared to the Polypolisten deducts only a smaller amount. On the other hand, he benefited from the ability to collect monopoly prices.

Overall, however, a net welfare loss can be seen (indicated by the red area ZL).

Classification and conclusions on competition policy

The statements of the welfare model for the monopoly case are largely undisputed - in most cases are the disadvantages of a monopoly over a Polypol beyond question. Not included, however, are here more efficiency disadvantages: a monopoly leads due to the lack of competitive pressure may also have other channels to welfare losses: Scientific studies show

  • An often slowing innovation joy at monopolists (ie, it develops only slowly new, better quality products )
  • Lower productivity of the monopolist (that may be a large part of its monopoly profits offset by inefficiencies in production )
  • A worse service than on Polypolmärkten
  • Fewer product variations (ie, the monopolist offers its customers generally less modifications of the product, which could be more suitable for the respective customer needs ). From this perspective, it appears as an important task of competition policy to prevent monopolies.

It should not be forgotten that, in certain cases, a monopoly may be welfare optimal well; so, for example, conceivable that a national monopolist due to its domestic monopoly profits in foreign markets more competitive, and thus may need additional domestic creates jobs (as an example of this could be, for example, the tight oligopoly are listed on the German energy market ). Furthermore, it is conceivable that in some markets due to high fixed costs sufficient revenues are only achievable for a company.

Model criticism

Net welfare losses are generally recognized in the neoclassical theory. However, it should finally be discussed some arguments that critically deal with the issue.

Net welfare losses are ultimately due not only to the collection of taxes. After a few ideas of suspicion lies near that the defamation of taxes as a source of welfare losses to serve, against the state and its citizens to increase the power of business and to promote public poverty.

According to the Keynesian view, the distribution of income determines the growth of production. After -tax increase production growth as it flows to those consumers whose consumption rate is higher than the rate of consumption of high earners. That is: It is claimed that the demand for consumer goods of high earners is relatively low and thus leads to their incomes their saving behavior to the fact that too little consumer demand will unfold, leading in consequence to a slowdown in demand for capital goods.

According to another view, the model does not defamed government intervention because it government revenue from taxes and customs duties, an equivalent benefit zubilligt as revenue of the private market actors. In this state, the model ignores inefficiencies even benevolently on the perspective of his supporters - a defamation therefore do not find place.

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