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[[Economics]] is both a ''positive science'' and a ''normative science''. Economics as a '''positive science''' studies how markets and economies work, regardless of whether or not those institutions produce a desirable result. '''Welfare economics''' is the '''normative''' study of the types of outcomes that an economic system ''should'' be producing, and whether or not those outcomes are being produced.<ref>Hirshleifer, J and Hirshleifer, D (1997) ''Price Theory and Applications'' ISBN 0131907786</ref>
[[Economics]] is both a ''positive science'' and a ''normative science''. Economics as a '''positive science''' studies how markets and economies work, regardless of whether or not those institutions produce a desirable result. '''Welfare economics''' is the '''normative''' study of the types of outcomes that an economic system ''should'' be producing, and whether or not those outcomes are being produced.<ref>Hirshleifer, J and Hirshleifer, D (1997) ''Price Theory and Applications'' ISBN 0131907786</ref>


===Economics as a normative science===
===The problem of interpersonal utility comparisons===
As a normative science, welfare economics is the study of what kinds of things an economy ''should'' produce. This can be a particularly contentious topic as there is not a universal consensus on what those goals should be. The two most frequently discussed objectives are ''equity'' and ''efficiency''. At its core, welfare economics can be thought of as a study of the tradeoff between these two goals.
Welfare economics addresses the issue of interpersonal utility comparisons by using observations about consumption as a vector of choices rather than a utilitarian summation of the utility they derive from a particular consumption bundle. When making comparisons between more than one individual, a particular allocation of resources is '''pareto-optimal''' if you could not make one individual better off without making another person worse off.


Efficiency and equity are frequently in conflict because ''efficiency drives [[economic growth]]'' which increases the total quantity of resources available within a society, whereas ''equity can only re-allocate'' the distribution of a fixed set of resources. Welfare economics studies how this tradeoff is effected by different policies, and the acceptability of those policies to the participants of an economic system.
===Fundamental theorems of welfare economics===
In a market mechanism with flexible prices, individuals will continue to trade with each other until they reach an optimal outcome. The market provides a mechanism for individuals to communicate their preferences through prices so that each individual will be able to an optimal bundle of consumption given a particular budget constraint.
 
====First theorem of Welfare Economics====
In a market with many traders where prices are flexible, any equilibrium will be pareto-optimal.  
 
====Second theorem of Welfare Economics====
Every outcome that is pareto-optimal can be realized in a market with many traders and flexible prices provided an appropriate initial distribution of endowments.


====Equity====
'''Equity''' in economics, represents how evenly resources are distributed within a society. In economics, equity usually refers to  ''equality of outcomes'' rather than ''equality of opportunity''. More specifically, economic systems which focus on equity implement policies that transfer resources from wealthier individuals to those with lower incomes. The moral justification for equity as an economic goal is the [[diminishing marginal utility of wealth]], which is the notion that a poor person receiving a wealth transfer from a government program will experience a greater positive change in [[utility]] than the corresponding loss of utility associated with the tax to pay for the government program.


====Efficiency====
The goal of [[economic efficiency]] is to reduce the ''transactions costs'' associated with redistributive economic policy and the ''distortion of incentives'' that occurs as a result of some kinds of taxation. A good example of this kind of '''distortion of incentives''' would be a [[progressive income tax]] that takes more money as personal income increases. If an individual chooses to work less under the income tax than he would otherwise do so, the output he would have produced with his labor as well as the utility he would have derived from his wages are both foregone as a [[deadweight loss]].


==References==
==References==
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Government policy is a frequent topic in welfare economics.

Economics is both a positive science and a normative science. Economics as a positive science studies how markets and economies work, regardless of whether or not those institutions produce a desirable result. Welfare economics is the normative study of the types of outcomes that an economic system should be producing, and whether or not those outcomes are being produced.[1]

The problem of interpersonal utility comparisons

Welfare economics addresses the issue of interpersonal utility comparisons by using observations about consumption as a vector of choices rather than a utilitarian summation of the utility they derive from a particular consumption bundle. When making comparisons between more than one individual, a particular allocation of resources is pareto-optimal if you could not make one individual better off without making another person worse off.

Fundamental theorems of welfare economics

In a market mechanism with flexible prices, individuals will continue to trade with each other until they reach an optimal outcome. The market provides a mechanism for individuals to communicate their preferences through prices so that each individual will be able to an optimal bundle of consumption given a particular budget constraint.

First theorem of Welfare Economics

In a market with many traders where prices are flexible, any equilibrium will be pareto-optimal.

Second theorem of Welfare Economics

Every outcome that is pareto-optimal can be realized in a market with many traders and flexible prices provided an appropriate initial distribution of endowments.


References

  1. ↑ Hirshleifer, J and Hirshleifer, D (1997) Price Theory and Applications ISBN 0131907786
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