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There is a strong presumption, however, that economic welfare is reduced if the government undertakes the allocation of resources would otherwise be allocated by the unimpeded operation of market forces. The theorems of [[welfare economics]] demonstrate that market forces operating under conditions of ''perfect competition'' and ''flexible prices'' guarantee the optimum allocation of a country's resources. A centrally-determined allocation of resources cannot offer such a guarantee because those responsible lack access to the information about the preferences of consumers that is provided to a competitive market by their purchasing behaviour. But if market forces are impeded by monopolistic possessors of ''market power'' or by the presence of ''externalities'', that information is distorted, economic welfare is diminished, and there is a possibility that public expenditure could be used to correct the deficiency. | |||
The quantification of the economic effects of public expenditure is subject to errors and uncertainties arising from the practical difficulty of determining the preferences of those affected and the conceptual obstacle to the aggregation of their gains and losses of economic welfare<ref> See "The Social Welfare Controversy"[http://en.citizendium.org/wiki/Welfare_economics/Tutorials#The_social_welfare_controversy]</ref>. In contrast, social welfare is necessarily maximised, according to the theorems of [[welfare economics]], by market forces operating under conditions of ''perfect competition'' and ''flexible prices''. For those reasons, it is generally presumed that social welfare is reduced if the public sector controls the provision of goods and services that could otherwise be supplied by the private sector<ref> The article on [[public goods]] deals with circumstances under which the alternative of supply by the private sector is not available, or only partially available</ref>. That presumption is tenable only in the absence only in the absence of significant amounts of ''market power'', and it has been argued that it need not hold when there is appreciable interdependence among members of a community<ref>[http://www.questia.com/read/66063831 William Baumol: ''Welfare Economics and the Theory of the State'', Chapter 12, page 180 (summary), Harvard University Press, 1965. (accessible online to Questia subscribers)]</ref>. | |||
It is nevertheless common practice to evaluate public expenditure proposals, such as road improvements, using the technique of [[cost-benefit analysis]]. | |||
==Political aspects== | |||
The conceptual obstacle to interpersonal arises from the fact that it is not possible to know what goes on in someone else's mind. But, although a full understanding is clearly impossible, some insight is often provided by introspection, and there are cases where an approximate comparison is all that is needed. There can be little doubt for example that a road improvement that saves a hundred lives yields benefits that outweigh the costs suffered by a few families who have to move to new homes. | |||
Revision as of 00:59, 6 November 2009
There is a strong presumption, however, that economic welfare is reduced if the government undertakes the allocation of resources would otherwise be allocated by the unimpeded operation of market forces. The theorems of welfare economics demonstrate that market forces operating under conditions of perfect competition and flexible prices guarantee the optimum allocation of a country's resources. A centrally-determined allocation of resources cannot offer such a guarantee because those responsible lack access to the information about the preferences of consumers that is provided to a competitive market by their purchasing behaviour. But if market forces are impeded by monopolistic possessors of market power or by the presence of externalities, that information is distorted, economic welfare is diminished, and there is a possibility that public expenditure could be used to correct the deficiency.
The quantification of the economic effects of public expenditure is subject to errors and uncertainties arising from the practical difficulty of determining the preferences of those affected and the conceptual obstacle to the aggregation of their gains and losses of economic welfare[1]. In contrast, social welfare is necessarily maximised, according to the theorems of welfare economics, by market forces operating under conditions of perfect competition and flexible prices. For those reasons, it is generally presumed that social welfare is reduced if the public sector controls the provision of goods and services that could otherwise be supplied by the private sector[2]. That presumption is tenable only in the absence only in the absence of significant amounts of market power, and it has been argued that it need not hold when there is appreciable interdependence among members of a community[3].
It is nevertheless common practice to evaluate public expenditure proposals, such as road improvements, using the technique of cost-benefit analysis.
Political aspects
The conceptual obstacle to interpersonal arises from the fact that it is not possible to know what goes on in someone else's mind. But, although a full understanding is clearly impossible, some insight is often provided by introspection, and there are cases where an approximate comparison is all that is needed. There can be little doubt for example that a road improvement that saves a hundred lives yields benefits that outweigh the costs suffered by a few families who have to move to new homes.
- ↑ See "The Social Welfare Controversy"[1]
- ↑ The article on public goods deals with circumstances under which the alternative of supply by the private sector is not available, or only partially available
- ↑ William Baumol: Welfare Economics and the Theory of the State, Chapter 12, page 180 (summary), Harvard University Press, 1965. (accessible online to Questia subscribers)