Welfare economics is a branch of economics which adopts microeconomic techniques to study and evaluate the well being on an economy-wide level. Welfare economics usually relate to two fundamental theorems. The first asserts that given specific assumptions, competitive markets produce efficient outcomes. The second theory affirms that given specific restrictions any efficient outcome can be supported as a competitive market equilibrium. Therefore, social planners can use a social welfare function to understand which is the most equitable efficient outcome.
Over the years, there have been several attempts to apply the principles of welfare economics to different contexts. This has provoked the rise of the public economics discipline which focuses on how the government can improve social welfare.
As well as this, welfare economics give the theoretical foundation of different tools used in public economics such as the cost-benefit analysis.
Welfare economics has been recognised as a discipline during the 20th century. Before, the term ‘welfare’ was seen as the sum of the individual satisfaction within an economic system.
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