welfare economics

WELFARE ECONOMICS:MEANING,PARETO’S OPTIMALITY,�RENT AND RICARDIAN THEORY OF RENT,QUASI RENT

1. WELFARE ECONOMICS:MEANING,PARETO’S OPTIMALITY, RENT AND RICARDIAN THEORY OF RENT,QUASI RENT

2. WELFARE ECONOMICS A branch of economics that focuses on the optimal allocation of resources and goods and how this affects social welfare . Welfare economics analyzes the total good or welfare that is achieved at a current state as well as how it is distributed. Welfare economics is a subjective study that may assign units of welfare or utility in order to create models that measure the improvements to individuals based on their personal scales.

3. Prof . Baumol states that, “Welfare Economics has concerned itself mostly with policy issues which arise out of the allocation of resources, with the distribution of inputs among the various commodities and the distribution of commodities among various consumers .” And it may be emphasised again that allocation of resources is efficient or optimum when social welfare is maximum . E conomists use a criterion known as Pareto- optimality criterion for evaluating whether social welfare increases or decreases as a result of a specific change in economic state.

4. PARETO’S OPTIMALITY Pareto efficiency, or Pareto optimality, is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. The term is named after  Vilfredo Pareto (1848–1923), an Italian economist who used the concept in his studies of economic efficiency and income distribution. The concept has applications in the life sciences.

5. An economy is in a Pareto Optimal state when no further changes in the economy can make one person better off without at the same time making another worse off. Eg : When there are two individuals, one with a loaf of bread and the other with a block of cheese, both can be made better off by exchanging the bread for cheese. A Weak Pareto efficiency is the result of a change that makes at least one party better off, and does   not make any party worse off . A strong Pareto efficiency is the result of a change in allocation in which all dimensions gain.

6. In curve below a move from B to C, A to B, A to D,  causes a weak Pareto efficiency. In curve below a move from A to C, or from A to any point on CD causes a strong Pareto efficiency. In the curve below, for A, BC is Weak Pareto Optimal and  CD is strong Pareto optimal.

7. PARETO IMPROVEMENT A Pareto improvement is said to have taken place if a change is made in the distribution of goods or resources that results in at least one individual being better off than before the change while not making any other individual worse. Pareto optimality is to described as any state where no Pareto improvement is possible. This effectively means that it is impossible to improve the condition of any single individual without harming the condition of another individual.

8. RENT Rent is the amount paid for the use of land. Rent is the payment for the use of only land and is different from contractual rent which includes the returns on capital investment made by the landlord in form of wells, irrigation structures, etc., besides the payment for the use of land. Two important theories of rent are # Ricardian theory of rent # Modern theory of rent

9. RICARDIAN THEORY OF RENT According to Ricardo, “Rent is the portion of the produce of the earth which is paid to the landlord for the use of original and indestructible powers of the soil”. Ricardo believed that rent takes place on account of differences in the fertility of land . Rent might too arise on account of situational benefit e ven when all lands are uniformly fertile. Ricardian rent is also known as pure rent.

10. It is mainly based on two assumptions: # Land differs in fertility. # The most fertile lands are limited in supply. The three important aspects of the Ricardian Theory of Rent are:   The Indestructible powers of Soil means that the Properties of Land cannot be changed by human beings like the fertility of Land, the nature of the soil.  Here he stresses even the bombs cannot destroy the powers of the land.    His theory of rent is based on the Law of diminishing Returns.      His theory is based on the increase in the population.   `

11. Eg : Ricardo described his theory by taking the illustration of colonization. When some people go and settle down in a place, at first they will cultivate the best lands. When more people go and settle down, the demand for land will raise and they will cultivate the second-grade lands.   The cost of production will go up. Therefore the price of grain in the market should cover the cost of cultivation. In this situation, the first grade land will obtain rent. After some time, when there is raise in population, even third grade lands will be cultivated. Now, even second grade lands will obtain rent and first grade lands will obtain more rent however the third grade land will not obtain rent. It is termed as no-rent land or marginal land.

12. According to Ricardo, rent is price determined , i.e., it is determined by price of the grains generated in the land. He also believed that rent is high since price is high and not the other way round. Ricardo came to the conclusion that rent did not enter price since there are certain no-rent or marginal lands. Since the produce of no-rent land obtains a price, Ricardo argued that rent did not enter price. In figure above, grades of land are shown all along the X axis and the yield up the y–axis. The shaded region in the diagram points out rent. In this condition, grade I and grade II lands get rent. The grade III land will not obtain rent.

13. QUASI RENT Quasi rent is the earning of capital equipments such as machineries, buildings, etc., which are inelastic in supply, in short run. According to Marshall,the quasi rent is only a temporary surplus ,which is enjoyed by the owner of the capital equipments in the short run. This is due to the increase in its demand and it will disappear in long run, if supply of the capital equipment is increased I response to the increased demand. Quasi rent = Total revenue earned – Total variable costs

14. DIFFERENCE BETWEEN RENT AND QUASI RENT # Rent is a payment for natural gifts like land. Quasi rent is a payment for man made appliances like machines. # As the supply of land cannot be changed, rent persists in both short run and long run. But quasi rent is a short run phenomenon which disappears in the long run. # Rent is permanent in nature while quasi rent is a temporary phenomenon. # Rent cannot be zero but quasi rent can be zero when the short run price of the commodity equals its average variable cost.

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