A Bit More on Welfare Economics, External Effects, and Interpersonal Comparisons of Well-Being

The ethical goal of welfare economics is increasing societal WB, not efficiency. And it does not imply that unregulated competitive markets are best for increasing societal welfare or efficiency. Even absent external effects, markets are inefficient unless everyone experiences their HRAP. Chapter 4 briefly discussed external effects: the effect your behavior has on the WB (or want fulfillment) of others. Typical examples include pollution, global warming, and germs spread: examples where others are physically affected. But! Most behaviors affect others, not physically but emotionally. Your behavior directly affects their WB: it angers, frustrates, or delights. [Consider my distaste for physical displays of affection by people with red hair!] Often your behavior only affects their relative position. [Consider my anger caused by your acceptance at Econometrica.] Chapter 5 indicated substantial relative-wealth effects. Shudder at their implications for welfare economics in practice. Other topics include the implications of the common quirks for welfare economics, plus more on the implications of strictly ordinal WB. Do we conclude that welfare economics can only say that Pareto improvement increases societal WB while admitting most behaviors and policies make someone worse off? If WB is cardinal and cardinal comparable across individuals, how does society weigh yours vs. mine on its societal WB scale? It is not surprising that interpersonal WB comparisons are coming back (e.g., Rawls, Sen, and Dasgupta—economic ethicists but not welfare economists).