4 - Equilibrium Theory and Normative Economics

Summary

Chapter 4 sketches the contemporary theory of economic welfare. It argues that welfare economics is a theoretically driven discipline, whose questions are determined more by equilibrium theory than by practical problems of economic welfare. Section 1 begins with the fundamental question: what is welfare or, synonymously, well-being? Section 2 explains why the answer that economists give has led them to eschew utilitarianism, and it links this chapter to the previous three, presenting the fundamental theorems of welfare economics, the grounds for the admiration economists have for the operation of perfectly competitive markets, the problems of markets that are not perfectly competitive, and further theorems concerning social choice and welfare. Section 3 turns to practical work in welfare economics and the foundations of cost-benefit analysis. Section 4 ends with an overview, including some remarks about alternatives to mainstream normative economics.