American Economic Association

Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay

Author(s): Arnold C. Harberger
Reviewed work(s):
Source: Journal of Economic Literature, Vol. 9, No. 3 (Sep., 1971), pp. 785-797
Published by: American Economic Association
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T h r e e B a s i c Pos tula te s f or
Appli e d We lf a r e Ec onomi c s :
An Inte r pr e ti ve Es s a y
B y
ARNOLD C. HARB ERGER
Uni ve r s i ty of Ch i c a go
I would li ke to e xte nd my th a nks to my c olle a gue , Ha r r y G. Joh ns on, f or h i 8
h e lpf ul c omme nts , to Da ni e l Wi s e c a r ve r , f or h e lp e xte ndi ng we ll be y ond th e
nor ma l c a ll of duty f or a r e s e a r c h a s s i s ta nt, a nd to Rudi ge r Dor nbus c h a nd
Robe r t Gor donf or va lua ble s ugge s ti ons gi ve na f te r th e f i r s t dr a f t of th i s pa pe r
wa s c omple te d. Ne e dle s s to a dd, th e y do not be a r a ny r e s pons i bi li ty f or s uc h
f la ws or
de f i c i e nc i e s a s ma y r e ma i ni n th i s pa pe r .
T HIS PAPER i S i nte nde d not a s a s c i e nti f i c
s tudy , nor a s a r e vi e w of th e li te r a tur e ,
but r a th e r a s a tr a c t-a n ope n le tte r to th e
pr of e s s i on, a s i t we r e -ple a di ng th a t th r e e
ba s i c pos tula te s be a c c e pte d a s pr ovi di ng a
c onve nti ona l f r a me wor k f or a ppli e d we lf a r e
e c onomi c s . T h e pos tula te s a r e :
a ) th e c ompe ti ti ve de ma nd pr i c e f or a gi ve n
uni t me a s ur e s th e va lue of th a t uni t to th e
de ma nde r ;
b) th e c ompe ti ti ve s upply pr i c e f or a gi ve n
uni t me a s ur e s th e va lue of th a t uni t to th e
s uppli e r ;
c ) wh e n e va lua ti ng th e ne t be ne f i ts or c os ts
of a gi ve n a c ti on (pr oje c t, pr ogr a m, or pol-
i c y ), th e c os ts a nd be ne f i ts a c c r ui ng to e a c h
me mbe r of th e r e le va nt gr oup (e .g., a na ti on)
s h ould nor ma lly be a dde d wi th out r e ga r d to
th e i ndi vi dua l(s ) to wh omth e y a c c r ue .
In a n e r a wh e n li te r a lly th ous a nds of
s tudi e s i nvolvi ng c os t-be ne f i t a na ly s i s or
oth e r ty pe s of a ppli e d we lf a r e e c onomi c s a r e
unde r wa y a t a ny gi ve n mome nt, th e ne e d
f or a n a c c e pte d s e t of pr of e s s i ona l s ta nda r ds
f or th i s ty pe of s tudy s h ould be obvi ous . In
pr of f e r i ng pos tula te s a -c a s th e ba s i s f or
s uc h a s e t of s ta nda r ds , I do not wa nt to
ove r s ta te th e i r be ne f i ts . Jus t a s th e r oa d-
c ons tr uc ti on s ta nda r ds th a t a te a m of h i gh -
wa y e ngi ne e r s mus t me e t c a n be c h e c ke d by
oth e r h i gh wa y e ngi ne e r s , s o th e e xe r c i s e i n
a ppli e d we lf a r e e c onomi c s c a r r i e d out by one
te a m of e c onomi s ts s h ould be s ubje c t to
c h e c k by oth e r s . B ut wh i le th e h i gh wa y e n-
gi ne e r s c a n a pply pr of e s s i ona l s ta nda r ds to
c h a r a c te r i s ti c s s uc h a s th i c kne s s of ba s e ,
loa d-c a r r y i ng c a pa c i ty , dr a i na ge c h a r a c te r -
i s ti c s , a nd th e li ke , c h a r a c te r i s ti c s s uc h a s
s c e ni c be a uty a r e be y ond th e i r c ompe te nc e
a s pr of e s s i ona l e ngi ne e r s . In th e s a me wa y ,
a ny pr ogr a mor pr oje c t th a t i s s ubje c te d to
a ppli e d-we lf a r e -e c onomi c a na ly s i s i s li ke ly to
h a ve c h a r a c te r i s ti c s upon wh i c h th e e c ono-
mi s t a s s uc h i s not pr of e s s i ona lly qua li f i e d to
pr onounc e , a nd a bout wh i c h one e c onomi s t i s
not pr of e s s i ona lly qua li f i e d to c h e c k th e opi n-
i onof a noth e r . T h e s e e le me nts -wh i c h s ur e ly
i nc lude th e i nc ome -di s tr i buti ona l a nd na -
ti ona l-de f e ns e a s pe c ts of a ny pr oje c t or pr o-
gr a m, a nd pr oba bly i ts na tur a l-be a uty a s pe c ts
a s we ll-ma y be e xc e e di ngly i mpor ta nt, pe r -
h a ps e ve n th e domi na nt f a c tor s gove r ni ng
a ny poli c y de c i s i on, but th e y a r e not a pa r t
of th a t pa c ka ge of e xpe r ti s e th a t di s -
ti ngui s h e s th e pr of e s s i ona l e c onomi s t f r om
th e r e s t of h uma ni ty . And th a t i s wh y we
785
786 Jour na l of Ec onomi c Li te r a tur e
c a nnot e xpe c t to r e a c h a pr of e s s i ona l c on-
s e ns us c onc e r ni ng th e m. If we a r e to ta ke a
(h ope f ully jus ti f i e d) pr of e s s i ona l pr i de i nour
wor k, we a ls o mus t h a ve th e mode s ty a nd
h one s ty not to c la i m f or our pr of e s s i on
mor e th a n we a r e pa r ti c ula r ly qua li f i e d to
de li ve r . B ut th i s doe s not me a nth a t we ne e d
be s i le nt on ma tte r s th a t li e outs i de th e
r a nge of our pr of e s s i ona l e xpe r ti s e ; e c ono-
mi s ts s h ould pr oba bly pa r ti c i pa te mor e
r a th e r th a n le s s i n th e publi c di s c us s i on of
s uc h ma tte r s , but h ope f ully i na c onte xt th a t
r e c ogni ze s th e e xtr a -pr of e s s i ona l na tur e of
th e i r i nte r ve nti on.
Some r e a de r s wi ll undoubte dly r e c ogni ze
th a t pos tula te s a -c unde r li e mos t a na ly s e s
th a t us e th e c onc e pts of c ons ume r a nd pr o-
duc e r s ur plus . T h a t be i ng th e c a s e , one mi gh t
a s k, wh a t i s th e ne e d f or a tr a c t on th e s ub-
je c t? My a ns we r s te ms f r omth e f a c t th a t,
a s a n i nve te r a te pr a c ti ti one r of a ppli e d
we lf a r e e c onomi c s a long ma ny di f f e r e nt li ne s ,
I e nc ounte r wi th c ons i de r a ble r e gula r i ty c ol-
le a gue s wh o a r e s ke pti c a l of c ons ume r s ur plus
on one or mor e of s e ve r a l a lle ge d gr ounds :
(i ) Cons ume r -s ur plus a na ly s i s i s va li d only
wh e n th e ma r gi na l uti li ty of r e a l i nc ome i s
c ons ta nt.
(i i ) Cons ume r -s ur plus a na ly s i s doe s not ta ke
a c c ount of c h a nge s i n i nc ome di s tr i buti on
c a us e d by th e a c ti on(s ) be i ng a na ly ze d.
(i i i ) Cons ume r -s ur plus a na ly s i s i s pa r ti a l-
e qui li br i umi n na tur e , a nd doe s not ta ke a c -
c ount of th e ge ne r a l-e qui li br i um c ons e -
que nc e s of th e a c ti ons wh os e e f f e c ts a r e be i ng
s tudi e d.
(i v) Cons ume r -s ur plus a na ly s i s , th ough va li d
f or s ma ll c h a nge s , i s not s o f or la r ge c h a nge s .
(v) T h e c onc e pt of c ons ume r s ur plus h a s be e n
r e nde r e d obs ole te by r e ve a le d-pr e f e r e nc e
a na ly s i s .
Wh i le I do not h a ve th e i mpr e s s i onth a t th e
s ke pti c s domi na te pr of e s s i ona l opi ni on i n
th i s a r e a , th e y a r e s uf f i c i e ntly nume r ous (a nd
a numbe r of th e m s uf f i c i e ntly pr e s ti gi ous )
th a t we s ur e ly c a nnot be s a i d to h a ve
a c h i e ve d a h i gh de gr e e of pr of e s s i ona l c on-
s e ns us on th e s ubje c t. Ye t I f e e l, pr e c i s e ly
be c a us e of th e powe r a nd wi de a ppli c a bi li ty
of th e c ons ume r -s ur plus c onc e pt, th a t a
r e c ogni za ble de gr e e of c ons e ns us c onc e r ni ng
i t would i nc r e a s e , to s oc i e ty 's ge ne r a l be ne f i t,
th e i nf lue nc e on publi c poli c y of good e c o-
nomi c a na ly s i s . Mor e ove r , I th i nk th a t th e r e
i s a f a i r c h a nc e of c onvi nc i ng a goodly s h a r e
of th e s ke pti c s th a tpos tula te s a toc c ons ti tute
th e mos t r e a s ona ble ba s i s on wh i c h to s e e k
pr of e s s i ona l c ons e ns us i n th e a r e a of a ppli e d
we lf a r e e c onomi c s . T h e me r i t of a tta i ni ng
s ome th i ng li ke a c ons e ns us , a nd th e pos -
s i bi li ty of h e lpi ng to i nduc e s ome move me nt
towa r d th a t e nd, pr ovi de th e moti va ti on f or
th i s tr a c t.
II
Or di na r i ly , I would c ons i de r i t qui xoti c to
e xpe c t muc h to r e s ult f r oma ny s uc h e f f or t.
B ut i nth i s c a s e my h ope s a r e buoy e d by th e
f a c t th a t i t i s e a s i ly pos s i ble f or ma ny
s ke pti c s to joi n th e c ons e ns us wi th out r e a lly
c h a ngi ng th e i r mi nds on a ny f unda me nta l
i s s ue s . How c a n th i s h a ppe n? B e c a us e i ) we
a lr e a dy h a ve a r e a s ona bly we ll-e s ta bli s h e d
c ons e ns us on th e ba s i c me th odology of na -
ti ona l-i nc ome me a s ur e me nt, i i ) i t i s e a s y to
s h ow th a t pos tula te s a -c i nc or por a te a gr e a te r
de gr e e of s ubtle ty of e c onomi c a na ly s i s th a n
doe s na ti ona l-i nc ome me th odology , a nd i i i )
mos t of th e "obje c ti ons " to c ons ume r -s ur plus
a na ly s i s h old a f or ti or i wi th r e s pe c t to th e
me a s ur e me nt of na ti ona l i nc ome . If we a r e
pr e pa r e d to mor e -or -le s s a gr e e on na ti ona l-
i nc ome me th odology (wh i le be i ng mi ndf ul of
i ts de f e c ts ), wh y s h ould we r e s i s t a ppr oa c h -
i ng a n a gr e e me nt on a me th odology f or a p-
pli e d we lf a r e e c onomi c s (a ls o ke e pi ng i ts
de f e c ts i nmi nd, but a wa r e a t th e s a me ti me
th a t th e y a r e muc h le s s s e r i ous th a n th os e
a pply i ng to na ti ona l i nc ome )?
Le t us c ons i de r s pe c i f i c a lly obje c ti ons (i ),
(i i ) a nd (v) a bove , c ompa r i ng i n e a c h c a s e
th e f or c e wi th wh i c h th e obje c ti on a ppli e s to
c ons ume r -s ur plus a na ly s i s on th e one h a nd,
a nd to th e us e of na ti ona l i nc ome a s a n i ndi -
Ha r be r ge r : Pos tula te s f or Appli e d We lf a r e Ec onomi c s 787
c a ti on of we lf a r e on th e oth e r -obje c ti ons
(i i i ) a nd (i v) a r e de a lt wi th i n s e c ti on III
be low.
Obje c ti on(i ). I wi ll la te r s h ow th a t th e a s -
s umpti onof c ons ta nc y of th e ma r gi na l uti l-
i ty of r e a l i nc ome i s not e s s e nti a l f or th e
va li di ty of c ons ume r -s ur plus me a s ur e s of
we lf a r e . He r e , h owe ve r , I s h a ll only note th a t
th e be ne f i ts a nd c os ts tr e a te d i n mos t a p-
pli c a ti ons of c ons ume r -s ur plus a na ly s i s (e .g.,
me a s ur e s of th e e f f i c i e nc y c os ts of a ta x or a n
a gr i c ultur a l pr ogr a m, c os t-be ne f i t a na ly s e s of
h i gh wa y or i r r i ga ti onpr oje c ts , e tc .) i nvolve
only a s ma ll f r a c ti on of a nor ma l y e a r 's
gr owth i n GNP. Fa r mor e vulne r a ble to th e
obje c ti on th a t th e ma r gi na l uti li ty of r e a l
i nc ome mi gh t h a ve c h a nge d a r e obs e r va ti ons
li ke "Re a l GNP double d be twe e n 1950 a nd
1970," or e ve n "Na ti ona l i nc ome wi ll gr ow
by $60 bi lli on ne xt y e a r ."
Obje c ti on(i i ). B y th e s a me toke n, th e
c h a nge s i ni nc ome di s tr i buti onr e s ulti ng f r om
a pa r ti c ula r me a s ur e be i ng s ubje c te d to c os t-
be ne f i t or c ons ume r -s ur plus a na ly s i s a r e
li ke ly to be mi ni ma l by c ompa r i s on wi th
th os e th a t oc c ur f r omde c a de to de c a de , or
e ve n f r omy e a r to y e a r , a s a c ons e que nc e of
a ll c a us e s . If , th e n, i t i s f e lt th a t "di s tr i bu-
ti ona l we i gh ts " s h ould be a ppli e d i n th e
f or me r c a s e , be f or e judgme nts c a n be ma de ,
i t i s e ve n mor e i mpor ta nt th a t th e y s h ould
be i nc or por a te d i n th e la tte r c a s e .
Obje c ti on(v). Cons i de r th e c a s e of th e c oa l
mi ne r wh o, r a c ke d wi th s i li c os i s , volunta r i ly
qui ts a $7-a n-h our job i n th e mi ne to ta ke a
ne wly -a va i la ble $2-a n-h our job c le r ki ng i n a
gr oc e r y s tor e . Na ti ona l i nc ome goe s down,
but we lf a r e i n a ll li ke li h ood goe s up. In
th i s c a s e c ons ume r -s ur plus a na ly s i s a c c or ds
wi th r e ve a le d pr e f e r e nc e , wh i le th e move -
me nt of na ti ona l i nc ome i s i n th e oppos i te
di r e c ti on f r om th e c h a nge i n we lf a r e . T h e
s a me i s tr ue f or th e te xtbook c a s e of th e
h ous e ke e pe r wh o ma r r i e s h e r e mploy e r .
Of c our s e , e c onomi s ts do not tr uly be li e ve
th a t r e a l NNP or na ti ona l i nc ome i s a c om-
ple te me a s ur e of we lf a r e . B ut i t i s e qua lly
tr ue th a t i n mos t of th e c onte xts i n wh i c h
c h a nge s i nth e s e ma gni tude s , or c ompa r i s ons
of th e ma c r os s r e gi ons or c ountr i e s a r e de a lt
wi th , th e di s c us s i on c a r r i e s s tr ong we lf a r e
c onnota ti ons , of te n to th e poi nt wh e r e i t
would be me a ni ngle s s i f th os e c onnota ti ons
we r e de ni e d. Na ti ona l i nc ome a nd NNP a r e ,
i n a ve r y r e a l s e ns e , me a s ur e s of we lf a r e un-
de r c e r ta i n a s s umpti ons , but only to a f i r s t
or de r of a ppr oxi ma ti on. No one would de ny
th a t ma ny oth e r f a c tor s a r e i mpor ta nt-th e
s tr e ngth of th e s oc i a l f a br i c , th e qua li ty of
li f e , a nd c e r ta i nly th e i s s ue of to wh omth e
i nc ome a c c r ue s -but i t i s not f e a s i ble to
bui ld th e s e i nto a na ti ona l-i nc ome me a s ur e .
Hy poth e ti c a lly , one mi gh t c onte mpla te a na -
ti ona l i nc ome me a s ur e i nc or por a ti ng "di s -
tr i buti ona l we i gh ts ," but two obs ta c le s s ta nd
i n i ts wa y : f i r s t, th e i mpos s i bi li ty of a c h i e v-
i ng a c ons e ns us wi th r e ga r d to th e we i gh ts ,
a nd s e c ond, th e f a c t th a t mos t of th e da ta
f r omwh i c h th e na ti ona l a c c ounts a r e bui lt
a r e a ggr e ga te s i n th e f i r s t pla c e , a nd do not
di s ti ngui s h th e i ndi vi dua ls or gr oups wh os e
dolla r s th e y r e pr e s e nt. Gi vi ng e qua l we i gh t
to a ll dolla r s of i nc ome i s ma th e ma ti c a lly
th e s i mple s t r ule , a nd our da ta c ome th a t
wa y i n a ny e ve nt. In a s e ns e , th e s e c ond ob-
s ta c le i mpos e s , r a th e r a r bi tr a r i ly to be s ur e ,
a s oluti on to th e pe r ple xi ng di f f i c ulti e s pos e d
by th e f i r s t. T h i s s oluti on i s obvi ous ly a f a r -
f r om-pe r f e c t me a s ur e of na ti ona l we lf a r e -
i nde e d i t i s s ur pr i s i ng h ow li ttle di s s a ti s f a c -
ti onh a s be e ne xpr e s s e d (unti l qui te r e c e ntly )
wi th i ts us e a s s uc h . B ut e ve n i ts f i r me s t de -
tr a c tor s would pr oba bly not de ny th e us e f ul-
ne s s of th e na ti ona l a c c ounts a nd th e ne c e s -
s i ty f or th e mto be bui lt onth e ba s i s of r ule s
or c onve nti ons r e f le c ti ng s ome de gr e e of
pr of e s s i ona l c ons e ns us .
An e a s y wa y to s e e th e r e la ti ons h i p be -
twe e n na ti ona l i nc ome a nd th e c ons ume r -
s ur plus c onc e pt i s to c ons i de r th e f i r s t two
te r ms of th e T a y lor e xpa ns i on of a uti li ty
f unc ti on
(1) U
T r
U_ 1
Xt
...
X
)
Jour na l
of
Ec onomi c Li te r a tur e
(2)
AU =
E Ui AXi
1
+ - E Uj,AXzAX,.
2
, ,
Si nc e Ui
i s a f unc ti on
s ole ly
of
(X1, X2
..
Xn),
we c a n wr i te
2Ui j AXi j=AU;
wi th th i s
(2) s i mpli f i e s
to
j
(3)
AU = E U
AXi + -
AUi AXi .
2
i
Now, a s s umi ng uti li ty
ma xi mi za ti on i n th e
f a c e of ma r ke t
pr i c e s (P1
* *
Pn)
we h a ve
Ui =XPi ,
wh e r e X
r e pr e s e nts
th e
ma r gi na l
uti li ty
of
i nc ome ,
a nd
(4)
AUi
=
XAP, + Pi AX + APi AX.
Subs ti tuti ng
f r om
(4)
i nto
(3)
we obta i n
AU
1
=
Pi AXi
f XO
+
-
A\X
(5)
1
1 AX
AP,AXi
2 4
1
.
XU +
-
AX)
2
Ne gle c ti ng
th i r d or de r
te r ms ,
th i s
y i e lds
AU
z
E
Pi AXi
1
X0 +
-
AX
2
(5')
1
+
2-
APi AXi .
T h e f i r s t te r mon th e
r i gh t-h a nd
s i de of
(5')
me a s ur e s th e f i r s t-or de r
c h a nge
i n
uti li ty ,
a nd c a n be i de nti f i e d wi th th e
c h a nge
i n na -
ti ona l i nc ome
(or ,
mor e
pr ope r ly ,
ne t na -
ti ona l
pr oduc t) e xpr e s s e d
i n c ons ta nt
pr i c e s .
T h e s e c ond te r mme a s ur e s th e s e c ond-or de r
c h a nge
i n
uti li ty ,
a nd c a n be i de nti f i e d wi th
th e
c h a nge
i n c ons ume r
s ur plus .'
T h e f a c t
1
T h i s i s
s tr i c tly
tr ue
only
wh e nth e
poi nt
of
de pa r tur e
i s one of
f ull,
undi s tur be d
e qui li br i um.
Wh e nth e s ta r t-
i ng poi nt
i s one wh e r e di s tor ti ons a r e
a lr e a dy pr e s e nt,
s ome of th e
c h a nge
i nc ons ume r
s ur plus
i s
i nc or por a te d
i nth e f i r s t te r m. T h i s
poi nt
wi ll be tr e a te d i nmor e de ta i l
be low.
th a t th e
c ons ume r -s ur plus c onc e pt
i s a s -
s oc i a te d wi th a
h i gh e r -or de r
te r m i n th e
T a y lor e xpa ns i on
of th e
uti li ty
f unc ti on i s
s i mply
th e ma th e ma ti c a l
c ounte r pa r t
of th e
s ta te me nt ma de e a r li e r th a t
"pos tula te s
a -c
i nc or por a te
a
gr e a te r de gr e e
of
s ubtle ty
of e c onomi c
a na ly s i s
th a n doe s na ti ona l i n-
c ome
me th odology ."
Note , too,
th a t
(5)
i n e f f e c t c onve r ts th e
c h a nge
i n
uti li ty
i nto
mone ta r y
te r ms
by
di -
vi di ng
i t
by
th e
ma r gi na l uti li ty
of i nc ome .
T h e r e i s
obvi ous ly
no
pr oble m
wh e n th e la t-
te r i s not
c h a ngi ng,
but wh e n i t doe s
c h a nge
a s a
c ons e que nc e
of th e
a c ti on(s ) be i ng
a n-
a ly ze d,
th e c onve r s i on of
uti li ty
i nto
mone y
i s
i mpli c i tly
c a r r i e d out a t th e
mi dpoi nt
of
th e
be gi nni ng
a nd
e ndi ng ma r gi na l
uti li ti e s
of i nc ome . T h e c r i ti c i s m2 th a t c ons ume r -s ur -
2
T h e
or i gi n
of th i s c r i ti c i s mi s
pr oba bly
th e
th ough t
th a t
c h a nge s
i n c ons ume r
s ur plus ough t di r e c tly
to
me a s ur e
c h a nge s
i n
uti li ty .
T h a t th i s would be a f r ui t-
le s s
pur s ui t
s h ould be
obvi ous -a mong
oth e r
th i ngs
c ons ume r
s ur plus
would not be i nva r i a nt to monotoni c
tr a ns f or ma ti ons of th e
uti li ty
f unc ti on.
Howe ve r ,
th e
me a s ur e J2AXi APi i s
i nva r i a nt,
wi th th e
c h a nge
i n
AU
s te mmi ng
f r oma monotoni c tr a ns f or ma ti on
be i ng
of f s e t
by
th e
c h a nge
i n
(X+i AX)
i n th e de nomi na tor of
th e le f t-h a nd s i de of
(5).
T h e
f ollowi ng wa y
of
s ta ti ng
th e s a me
a r gume nt
a voi ds th e
a ppr oxi ma ti oni mpli c i t
i n
a two-te r m
T a y lor e xpa ns i on:
th e
c h a nge
i n
uti li ty
s te mmi ng
f r omth e
c h a nge
i n a
poli c y
va r i a ble f r omzo
to z* i s
Au=
f
E Ui (z) dz.
zo Oz
T h i s , be i ng e xpr e s s e d
i n
uti ls ,
i s not i nva r i a nt to a
monotoni c tr a ns f or ma ti on.
Howe ve r , tr a ns f or mi ng
uti li ty
i nto
mone y c onti nuous ly th r ough
th e
i nte gr a ti on
pr oc e s s , a lwa y s
a t th e
ma r gi na l uti li ty
of
mone y pr e -
va i li ng
a t th a t
poi nt,
we h a ve
AW
v* U(Z) dxi
J. s X(z)
oz
f *
*
~
. U
Xi
dz.
= Pi (z)
- dz.
T h i s
obvi ous ly
i s i nva r i a nt unde r
a ny
tr a ns f or ma ti on of
th e
or i gi na l uti li ty
f unc ti on wh i c h le a ve s
unc h a nge d
th e
r e le va nt be h a vi or a l r e a c ti ons to
c h a nge s
i n z.
An i s s ue a r i s e s i n c onne c ti on wi th th e
c ompa r a bi li ty
of me a s ur e s of we lf a r e los s , wh e n one i s
c ompa r i ng
move s ontwo di f f e r e nt
pa th s (s a y
T 1 a nd
T 2) a wa y
f r om
th e undi s tor te d
e qui li br i um.
If th e
ma r gi na l uti li ty
of
th e nume r a i r e
(h e r e
r e a l
i nc ome )
i s c ons ta nt, th e r e i s no
i s s ue i n th i s
r e ga r d. Howe ve r , c ompa r a bi li ty
doe s not
788
k
Ha r be r ge r : Pos tula te s f or Appli e d We lf a r e Ec onomi c s 789
plus c onc e pts h a ve va li di ty only wh e n th e
ma r gi na l uti li ty of i nc ome i s c ons ta nt mus t
th e r e f or e be r e je c te d.
T h e c onve r s i onof uti li ty i nto mone y a ls o
gr e a tly e a s e s th e a ggr e ga ti on pr oble m.
Cle a r ly both th e f i r s t-or de r a nd th e s e c ond-
or de r te r ms on th e r i gh t-h a nd s i de of (5) c a n
be a ggr e ga te d ove r i ndi vi dua ls wi th out di f -
f i c ulty .
III
In th i s s e c ti on I s h a ll di s c us s obje c ti ons
(i i i ) a nd (i v), wh i c h we r e le f t a s i de i n th e
c ompa r i s onbe twe e n c ons ume r s ur plus a nd
na ti ona l i nc ome me th odologi e s i n th e pr e -
c e di ng s e c ti on. Obje c ti on(i i i ), th a t c ons ume r -
s ur plus a na ly s i s i s pa r ti a l-e qui li br i umi n na -
tur e , a nd f a i ls to ta ke a c c ount of ge ne r a l-
e qui li br i umc ons i de r a ti ons , i s tota lly i nva li d
ona th e or e ti c a l le ve l, but c a nf a i r ly be le vi e d
a ga i ns t s ome pr a c ti c a l a ppli c a ti ons .
T a ki ng th e th e or e ti c a l i s s ue f i r s t, one ne e d
only note th a t r i gor ous ge ne r a l-e qui li br i um
f or mula ti ons of c ons ume r -s ur plus me a s ur e -
me nt h a ve long s i nc e be e n a pa r t of th e c or -
pus of e c onomi c th e or y . Hote lli ng [10, 1938],
Hi c ks [7, 1941; 8, 1946; 9, 1956], a nd Me a de
[18, 1955, e s p. Vol. II] a ll h a ve de r i ve d, i n a
ge ne r a l-e qui li br i umf r a me wor k, me a s ur e s of
we lf a r e c h a nge th a t a r e c ons i s te nt wi th
pos tula te s a -c , a nd ma ny oth e r s h a ve f ol-
lowe d i n th e i r tr a i n.3
T h e ke y to unde r s ta ndi ng th e ge ne r a l-
e qui li br i umna tur e of th e c ons ume r -s ur plus
c onc e pt i s th e f ollowi ng s i mple me a s ur e of
we lf a r e c h a nge :
(6) AW==J Di (z)-dz.
=0 i 49Z
r e qui r e c ons ta nc y of th e ma r gi na l uti li ty of r e a l i nc ome ,
but only "we ll-be h a ve dne s s ." B y th i s I me a nth a t wh e n
r e a l i nc ome f a lls by A Y a s a c ons e que nc e of th e i mpos i -
ti on of T 2, i ts ma r gi na l uti li ty s h ould c h a nge by th e
s a me a mount a s oc c ur s wh e nr e a l i nc ome f a lls by AY a s
a c ons e que nc e of a ta x T 1.
3
Se e Cor le tt a nd Ha gue [1, 1953]; Ha r be r ge r [8, 1964;
4, 19641; Joh ns on [11, 1960; 192, 1962]; La nge [14,
1942]; Li ps e y a nd La nc a s te r [15, 1956-57]; Li ps e y
[16, 1970]; a nd Mc Ke nzi e [17, 1951].
Pi ~~~~~~~~Supply
De ma nd
Fi gur e 1.
He r e Di r e pr e s e nts th e e xc e s s of ma r gi na l
s oc i a l be ne f i t ove r ma r gi na l s oc i a l c os t pe r
uni t le ve l of a c ti vi ty i , Xi r e pr e s e nts th e
numbe r of uni ts of a c ti vi ty i , a nd z i s th e
poli c y va r i a ble , th e e f f e c ts of a c h a nge i n
wh i c h we a r e i nte r e s te d i n me a s ur i ng. T h e
Di (di s tor ti ons ) c a nta ke ma ny f or ms -a bout
wh i c h mor e wi ll be s a i d be low-but h e r e , f or
s i mpli c i ty of e xpos i ti on, I s h a ll a s s ume th a t
a ll th e Di ta ke th e f or mof ta xe s . A ta x qui te
obvi ous ly dr i ve s a we dge be twe e n de ma nd
pr i c e (wh i c h unde r pos tula te a me a s ur e s th e
va lue of th e ma r gi na l uni t to th e de ma nde r )
a nd s upply pr i c e (wh i c h unde r pos tula te b
me a s ur e s th e va lue of th e ma r gi na l uni t to
th e s uppli e r ), a nd th i s f i ts mos t na tur a lly
i nto th e f r a me wor k of th i s pa pe r .
If a ta x i s pla c e d on a s i ngle good j i n th e
a bs e nc e of a ny oth e r di s tor ti ons , (6) be c ome s
r T j* a xj
(7) AW j T , T dT j,
T j=O j
wh i c h i s e qua l to th e f a mi li a r we lf a r e -c os t
tr i a ngle (AB C i n Fi gur e 1). T h ough th e
de ma nd a nd s upply f unc ti ons of oth e r goods
ma y s h i f t a s a c ons e que nc e of pla c i ng a ta x
ongood j, th e me a s ur e of we lf a r e c h a nge i s un-
a f f e c te d by s uc h s h i f ts s i nc e th e di s tor ti ons
Di i na ll oth e r ma r ke ts a r e , by a s s umpti on i n
th i s c a s e , ze r o. Howe ve r , i f ta xe s on oth e r
goods a lr e a dy e xi s t wh e n
T j*
i s i mpos e d, th e
e f f e c ts of i ts i mpos i ti on a r e gi ve n by :
Jour na l
of
Ec onomi c
Li te r a tur e
r T *
Xj
(8)
a W=J
T ,
-
dT
0
T j50
01
j
r T j*T dXi
+f I
T i
-dT i .
T j=O i y j a T j
T h i s i s
e qua l
to th e
tr i a ngle
AB C i n
Fi gur e
1
(wh i c h ge ne r a te s
a
ne ga ti ve
c ontr i buti on to
we lf a r e ) plus ,
wi th c ons ta nt
T i s ,
th e
e xpr e s -
s i on
2i Zi T Ai ,
wh e r e
AXi me a s ur e s th e
c h a nge
i n th e
e qui li br i um qua nti ty
of
Xi
oc c a s i one d
by
th e
i mpos i ti on
of
T j*. Any
of
th e te r ms i n th i s
s umma ti on,
wh i c h i s wh a t
ma ke s th e di f f e r e nc e be twe e n
pa r ti a l-
a nd
ge ne r a l-e qui li br i uma ppr oa c h e s
wh e n oth e r
di s tor ti ons a r e
pr e s e nt,
c a nbe e i th e r
pos i ti ve
or
ne ga ti ve -wh e n
th e di s tor ti on i ts e lf i s
pos i ti ve (e .g.,
a
ta x),
a
pos i ti ve
c ontr i buti on
i s ma de to th e
c h a nge
i nwe lf a r e
i f ,
a s a c on-
s e que nc e
of a ne w di s tur ba nc e
(i n
th i s c a s e
th e
i mpos i ti on
of
T j*), Xi i nc r e a s e s ,
a nd a
ne ga ti ve
c ontr i buti on i f
Xi de c r e a s e s . Wh e n
th e di s tor ti on i ts e lf i s
ne ga ti ve (e .g.,
a s ub-
s i dy ),
th e c ontr i buti on to we lf a r e a s s oc i a te d
wi th
a c ti vi ty
i a s a
c ons e que nc e
of
T j*
i s
ne ga ti ve
i f
OXi /OT j>O
a nd
pos i ti ve
i f
OXi /OT j<O.
T h i s c a s e i s i llus tr a te d i n
Fi g-
ur e
2,
wh e r e i t i s a s s ume d th a t both th e de -
ma nd a nd
s upply
c ur ve s of
Xk s h i f t a s a
c ons e que nc e
of th e
i mpos i ti on
of
T j*.
If th e
s h i f t i s f r omth e s oli d de ma nd a nd
s upply
c ur ve s
(wh e n T i =O)
to th e br oke n one s
(wh e n T i = T i *),
th e a r e a EFGH
(= T kAXk)
i s a na dde d
los s ;
i f th e s h i f t i s i nth e oth e r di -
r e c ti on i t i s a n a dde d be ne f i t
h e lpi ng
to of f -
Fi gur e
2.
s e t
(a nd pos s i bly a c tua lly outwe i gh i ng)
th e
tr i a ngle
AB C i n
Fi gur e
1.
T h i s i s a c onve ni e nt
pla c e
to
poi nt
out th e
r e la ti ons h i p
be twe e n th e
ge ne r a l e xpr e s s i on
(8)
f or we lf a r e
c h a nge
a nd th e
a ppr oxi ma -
ti on
(5').
De f i ne
Ci +T i = Pi ,
a nd a s s ume
c ons ta nt c os ts of
pr oduc ti onCi ,
wi th th e r e -
s our c e c ons tr a i nt
ZCi Xi = Y, a c ons ta nt.4
Wh e n a ta x i s
i mpos e d
on
Xj
i nth e
pr e s e nc e
of
pr e -e xi s ti ng
ta xe s on oth e r
goods i -j,
we
h a ve , s ubs ti tuti ng Ci +T i =Pi
f or
i $j,
Cj= Pi O
a nd
T j*= APj
i nto
(5'),
Pi AXi +
- E
AP,AX, =
I
C
AX,
2
(5")
1
+
E
T i AXi +
-
E ACi AXi
2
1
+
-
T j*AX,.
2
Si nc e 2Ci AXi = ACi AXi =O
unde r our a s -
s umpti ons ,
we h a ve
(5'")
1
= PL
X
X +-E APT XA
=
,
T ,a X +
-
T *AXj
2
a s a me a s ur e of th e
c h a nge
i n we lf a r e s te m-
mi ng
f r om th e
i mpos i ti on
of
T j*.6
T h i s i s
4
T h e s e
a s s umpti ons
a r e c ons i s te nt wi th a s i tua ti oni n
wh i c h th e ta x r e ve nue s r e c e i ve d
by
th e
gove r nme nt
a r e
r e di s tr i bute d to th e
pr i va te
s e c tor vi a ne utr a l tr a ns f e r s .
For a mor e de ta i le d tr e a tme nt s e e
Ha r be r ge r [3, 1964].
6
Wh e r e no
pr e -e xi s ti ng
di s tor ti ons a r e
pr e s e nt,
a nd a
ve c tor of di s tor ti ons T *=
(T 1*,
T 2*
*
T ,,*)
i s i ntr o-
duc e d, (6) be c ome s ,
f or li ne a r de ma nd a nd
s upply
c ur ve s ,
AW =
i 2 T AXi ,
wh e r e
Axi =
a X)
T * Ad,.
T h a t i s to
s a y ,
i f th e f i na l s e t of ta xe s i s
(.5, .A, .1),
one
c a n
i ma gi ne
th e
pr oc e s s
of
i nte gr a ti onta ki ng pla c e
th r ough s te ps
li ke
(.05, .02, .01), (.10,
.04, .02), (.15,
.06, .03),
e tc . T h e loc us of
poi nts
tr a c e d out
by
th i s
e xe r c i s e wi ll de f i ne th e s e t of
tr i a ngle s IT i AXi . As th i s
e xe r c i s e c a ni n
pr i nc i ple
be
pe r f or me d
f or
a ny
s e t of
di s tor ti ons
(not jus t ta xe s ),
i t i s
qui te ge ne r a l.
One mus t
note , h owe ve r ,
th a t th e
tr i a ngle s
tr a c e d out h e r e a r e not
tr i a ngle s
be twe e ns ta ble de ma nd a nd
s upply
c ur ve s but
r a th e r
tr i a ngle s
de f i ne d
by
th e loc i of
ma r gi na l
s oc i a l
be ne f i t
(de ma nd pr i c e )
a nd
ma r gi na l
s oc i a l c os t
(s upply
790
Ha r be r ge r :
Pos tula te s
f or Appli e d
pr e c i s e ly
wh a t
e me r ge s
f r om
(8) i n th e c a s e
wh e r e th e de ma nd a nd
s upply
c ur ve s f or
Xi
a r e li ne a r . It a ls o s h ows
h ow,
wh e nth e r e a r e
pr e -e xi s ti ng di s tor ti ons ,
e le me nts of c on-
s ume r
s ur plus
a r e
pr e s e nt
i n th e
e xpr e s s i on
2Pi %AXi , r e pr e s e nti ng
th e f i r s t-or de r
a ppr ox-
i ma ti onto we lf a r e
c h a nge .
Le t us r e tur nto th e di s c us s i onof
obje c ti on
(i i i ),
th a t
c ons ume r -s ur plus a na ly s i s ne gle c ts
ge ne r a l-e qui li br i um
c ons i de r a ti ons . Wh i le i t
i s c le a r th a t no th e or e ti c a l obs ta c le s ta nds i n
th e
wa y
of
ta ki ng
s uc h c ons i de r a ti ons i nto
a c c ount,
i t i s i nf a c t
r a r e ly
done i ns tudi e s i n-
volvi ng a ppli e d
we lf a r e e c onomi c s . I do not
wa nt to
a ppe a r
to de f e nd th i s
ne gle c t-i n-
de e d,
th e s oone r i t i s
r e c ti f i e d,
th e be tte r -
but a t th e s a me ti me I wa nt to
tr y
to
di s pe l
a ny th ough ts
th a t th e
job
of
i nc or por a ti ng
ge ne r a l-e qui li br i uma s pe c ts
i s s o
bi g
a s to be
e f f e c ti ve ly h ope le s s .
All th a t
job
e nta i ls i s
a ddi ng
to th e s ta nda r d
pa r ti a l-e qui li br i um
we lf a r e
a na ly s i s (of
th e ta x
T j*
i n our e x-
a mple ),
a n
e xpr e s s i onZi y j Di AXi . T h a t
ma y
look li ke a f or mi da ble ta s k but i t ne e d not
be . T h e s e t of a c ti vi ti e s wi th
s i gni f i c a nt
di s -
tor ti ons i s a s ubs e t of th e s e t of a ll
a c ti vi ti e s ;
th e s e t of a c ti vi ti e s wh os e le ve ls a r e
s i gni f i -
c a ntly
a f f e c te d
by
th e a c ti on unde r
s tudy
(e .g., T j*)
i s a noth e r s ubs e t of th e s e t of a ll
a c ti vi ti e s .
Only
th e i r i nte r s e c ti on
(s e e Fi gur e
3)
i s
i mpor ta nt
f or th e
a na ly s i s
of th e e f f e c ts
of th e
s pe c i f i c poli c y
a c ti on i n
que s ti on,
a nd
i t i s to be
h ope d
th a t i nmos t c a s e s th e num-
be r of e le me nts i n i t wi ll be of
ma na ge a ble
s i ze .6
Obje c ti on (i v)
c a n be de a lt wi th on s e v-
e r a l le ve ls . In th e f i r s t
pla c e ,
th e r e i s th e i s s ue
pr i c e )
a s ,u
goe s
f r om ze r o to one . On th i s r e s ult s e e
Hote lli ng's e qua ti on
19 a nd th e
s ubs e que nt
di s c us s i on
[10,1938].
6
Ce r ta i n
di s tor ti ons ,
s uc h a s th e
pr ope r ty
ta x or th e
c or por a ti on
i nc ome
ta x,
wh i c h
a pply
to a
la r ge
s ubs e t of
a c ti vi ti e s ,
c a nbe ta ke n i nto a c c ount
th r ough
th e us e of
s h a dow
pr i c e s -e .g.,
i n th i s c a s e th e s oc i a l
oppor tuni ty
c os t of
c a pi ta l.
Se e
Ha r be r ge r [5,
1968 a nd 6, 1969]. Onc e
th e "ge ne r a l" di s tor ti ons h a ve be e n
de a lt,
wi th i n th i s
wa y ,
th e
r e ma i ni ng one s ,
i t i s to be
h ope d,
wi ll be s uf -
f i c i e ntly
s ma ll i nnumbe r s o a s to
ke e p
th e
pr oble m
ma n-
a ge a ble .
SET OF ALL ACT IVIT IES
IL[J
Subs e t wi th
s i gni f i c a nt Di
F
Subs e t wi th
s i gni f i c a nt AXi
A Inte r s e c ti onof th e two s ubs e ts
Fi gur e
3.
of th e e xa c tne s s of
(5);
wh e nth e ba s i c
uti li ty
f unc ti ons a r e
qua dr a ti c ,
th e f i r s t two te r ms
of th e
T a y lor e xpa ns i on
a r e a ll th a t a r e ne e d-
e d to de s c r i be th e f unc ti on
f ully ;
but wh e nth e
ba s i c
uti li ty
f unc ti ons a r e not li ne a r or
qua -
dr a ti c , (5)
wi ll be a n
a ppr oxi ma ti on.
And
(5')
i s vulne r a ble e ve n wh e n th e
uti li ty
f unc ti on
i s
qua dr a ti c ,
be c a us e of i ts
ne gle c t
of th e
th i r d te r mof
(5).
B ut wh i le
(5)
a nd
(5')
th us
ma y
c onta i n e r r or s of
a ppr oxi ma ti on
wh i c h
wi ll be
s ma lle r ,
th e s ma lle r a r e th e
c h a nge s
be i ng s tudi e d, (6)
i s not
s ubje c t
to th e s a me
c h a r ge .
T h e
i nte gr a ls
s e t out th e r e c a n be
ta ke n f or c ur ve d a s we ll a s li ne a r de ma nd
a nd
s upply
c ur ve s , or ,
mor e
pr ope r ly s ta te d,
f or c ur ve d or li ne a r loc i of de ma nd
pr i c e s
a nd
s upply pr i c e s .
At a noth e r le ve l
e nti r e ly ,
one
mi gh t
i nte r -
pr e t
th e
la r ge -ve r s us -s ma ll-c h a nge s
i s s ue a s
r a i s i ng up
th e old
c ons ume r -s ur plus
c o-
nundr ums a bout th e va lue
a tta c h i ng
to th e
f i r s t uni ts of
li qui d
or th e f i r s t uni ts of
f ood,
e tc . I
pr e f e r
to
s i de s te p
th i s i s s ue on th e
gr ound
th a t th e
pr oble ms a r i s i ng
i n
a ppli e d
we lf a r e e c onomi c s
ty pi c a lly
do not i nvolve
c a r r y i ng pe ople
to or f r omth e ze r o
poi nt
i n
th e i r de ma nd c ur ve s f or f ood or f or
li qui ds ,
a nd wh e r e
th e y
do
(a s ,
f or
e xa mple
i nf a mi ne
r e li e f
pr ogr a ms ),
i t
a ppe a r s
mor e
a ppr opr i a te
- -
................... I I
We lf a r e
Ec onomi c s 791
792 Jour na l of Ec onomi c Li te r a tur e
F
A
G
XI
Fi gur e 4.
to a ppr oa c h th e pr oble mth r ough a s s i gni ng a
mone ta r y va lue to th e h uma n li ve s s a ve d or
los t, a ta s k wh i c h ne c e s s a r i ly c a r r i e s us be -
y ond th e na r r ow c onf i ne s of c ons ume r -s ur plus
a na ly s i s .
At s ti ll a noth e r le ve l, wh e n la r ge c h a nge s
a r e i nvolve d, th e we ll-be h a ve dne s s of f unc -
ti ons i s le s s e a s i ly gua r a nte e d th a nwh e nonly
s ma ll c h a nge s a r e pr e s e nt. For e xa mple , i t i s
e a s y to s h ow th a t th e Hi c ks -Sluts ky s ub-
s ti tuti on pr ope r ti e s a pply to de ma nd f unc -
ti ons de f i ne d by move me nts c ons tr a i ne d to
a loc us of th e f or m 2Ci Xi = Y, a c ons ta nt
(FO i n Fi gur e 4) s o long a s one i s c onc e r ne d
wi th s ma ll c h a nge s i n th e ne i gh bor h ood of
th e undi s tor te d e qui li br i um (e .g., i n th e
ne i gh bor h ood of A). Howe ve r , th i s c a nnot
be s h own to be ge ne r a lly tr ue f or la r ge
c h a nge s . For e xa mple , Fi gur e 4 i s s o c on-
s tr uc te d th a t a t both B a nd E th e i ndi f f e r -
e nc e c ur ve s i nte r s e c ti ng FG h a ve th e s a me
s lope . T h i s me a ns th a t a de ma nd f unc -
ti on c ons tr a i ne d to th e loc us FG (wi th r e a l
i nc ome be i ng h e ld c ons ta nt i n th i s s e ns e )
wi ll h a ve two qua nti ti e s a s s oc i a te d wi th th e
s a me r e la ti ve pr i c e . Exc e pt i nth e c a s e wh e r e
th e i nc ome e xpa ns i on pa th a t th a t pr i c e c o-
i nc i de d wi th th e s e gme nt EB be twe e n th e s e
two qua nti ti e s , th e r e would h a ve to be s ome
r a nge (s ) i n th a t qua nti ty i nte r va l i n wh i c h
th e own-pr i c e e la s ti c i ty of e a c h good wa s pos -
i ti ve , th us vi ola ti ng one of th e Hi c ks -Sluts ky
c ondi ti ons .7
T h e r e a r e a t le a s t two wa y s i n wh i c h a n-
a ly s e s ba s e d on pos tula te s a to c c a nbe jus ti -
f i e d i n th e f a c e of th i s pos s i ble c r i ti c i s m. At
th e s tr i c tly th e or e ti c a l le ve l, wh i le s ome r e -
s ults of s ome e xe r c i s e s i n a ppli e d we lf a r e
e c onomi c s ma y de r i ve di r e c tly f r om th e
Hi c ks -Sluts ky pr ope r ti e s , th e va li di ty of
e qua ti on (6) doe s not de pe nd onth e e xi s te nc e
of we ll-be h a ve dne s s i n th i s s e ns e . Alte r na -
ti ve ly one ma y s i mply ta ke i t a s a ma tte r of
c onve nti on th a t, jus t a s me a s ur e me nts of r e a l
na ti ona l i nc ome i n a s e ns e a r e bui lt on a
li ne a r a ppr oxi ma ti onof th e uti li ty f unc ti on,
s o we s h a ll ba s e c ons ume r -s ur plus a nd c os t-
be ne f i t a na ly s e s upon a qua dr a ti c a ppr oxi -
ma ti on of th a t f unc ti on, i nc or por a ti ng th e
Hi c ks -Sluts ky pr ope r ti e s . T h i s mor e "pr a g-
ma ti c " a ppr oa c h would pr e s uma bly be ba s e d
onth e unli ke li h ood of our e nc ounte r i ng c a s e s
i n wh i c h e mpi r i c a l e vi de nc e c a n be mus -
te r e d s h owi ng th a t s uc h a n a ppr oxi ma ti on
y i e lds s e r i ous ly bi a s e d nume r i c a l e s ti ma te s of
we lf a r e c os ts a nd/or be ne f i ts .
A f i na l va r i a nt of th e la r ge -ve r s us -s ma ll-
c h a nge s que s ti on c onc e r ns th e nor ma li za ti on
of me a s ur e s of we lf a r e c h a nge to c or r e c t f or
c h a nge s i n th e ge ne r a l pr i c e le ve l. Cons i de r
th e c a s e of a two-good e c onomy wi th X1C,
+X2C2= Y, a c ons ta nt. In th i s c onte xt one
c a n a na ly ze th e e f f e c ts of i mpos i ng, s a y , a
100 pe r c e nt ta x onX1, wi th no di s tor ti on on
X2,
or a lte r na ti ve ly gr a nti ng a 50 pe r c e nt
s ubs i dy to X2 wi th no di s tor ti on i n th e ma r -
ke t f or X1. As s umi ng th a t th e ta x pr oc e e ds
a r e r e tur ne d to th e publi c vi a ne utr a l tr a ns -
f e r s a nd th a t th e mone y f or th e s ubs i dy i s
r a i s e d by ne utr a l ta xe s , we s h ould e xpe c t
th e s a me r e a l e qui li br i umto be a c h i e ve d i n
both of th e a lte r na ti ve s i tua ti ons be i ng
c ompa r e d. We s h ould a ls o, pr e s uma bly , a r -
r i ve a t th e s a me me a s ur e f or AW. If we s e t
C1=C2=1, wh i c h i s s i mply a que s ti on
of c h oi c e of uni ts a nd e nta i ls no los s of ge n-
e r a li ty , wi th th z 100 pe r c e nt ta x on X1, th e
me a s ur e of we lf a r e c h a nge i s AW = 12AX1AP
= "AX1. Alte r na ti ve ly , wi th a 50 pe r c e nt
s ubs i dy to X2, th e we lf a r e c h a nge me a s ur e i s
7For a f ur th e r e la bor a ti onof th i s poi nt s e e Fos te r a nd
Sonne ns c h e i n [2, 1970].
Ha r be r ge r : Pos tula te s f or Appli e d We lf a r e Ec onomi c s 793
-AX2, wh i c h i s e qua l to wAX1, s i nc e
unde r our a s s umpti ons AX2= - AX1. T h i s
a mbi gui ty c a n r e a di ly be r e s olve d th r ough
th e a ppr opr i a te c h oi c e of a nume r a i r e . Wh e n
XI
i s th e nume r a i r e , th e 100 pe r c e nt ta x oni t
i s r e f le c te d i n th e pr i c e ve c tor c h a ngi ng f r om
(1, 1) to (1, 2), wh i c h i s e xa c tly wh a t h a ppe ns
wh e n a 50 pe r c e nt s ubs i dy to X2 i s i ntr o-
duc e d, s o long a s X1 i s th e nume r a i r e . Li ke -
wi s e , wh e n X2 i s th e nume r a i r e , th e 50
pe r c e nt s ubs i dy to i t pr oduc e s th e s a me pr i c e
ve c tor (2, 1) a s i s ge ne r a te d by th e 100
pe r c e nt ta x onXi . My ownpr e f e r e nc e a s to a
c onve nti ona l wa y of c or r e c ti ng f or c h a nge s
i nth e a bs olute pr i c e le ve l i s to nor ma li ze on
ne t na ti ona l pr oduc t= na ti ona l i nc ome . T h i s
e nta i ls s e tti ng 2Pi Xi
=
2CtX,=
Y, a c on-
s ta nt, wh i c h i n tur n i mpli e s , s i nc e Ci + T i
=
Pi , th a t 2 T Xi = 0. T h i s nor ma li za ti on
a utoma ti c a lly c a lls a tte nti on to th e f a c t th a t
mos t pr oble ms of a ppli e d we lf a r e e c onomi c s
a r e "s ubs ti tuti on-e f f e c t-only " pr oble ms , a
poi nt to wh i c h we s h a ll tur n i n th e ne xt
s e c ti on.
IV
In th i s s e c ti on I s h a ll di s c us s s ome of th e
c omple xi ti e s th a t ma y a r i s e i na ppli c a ti ons of
th e a na ly ti c a l a ppr oa c h r e pr e s e nte d by
pos tula te s a -c . Le t us f i r s t c ons i de r i n mor e
de ta i l th e c los e r e la ti on of th e pos tula te s to
"r e ve a le d pr e f e r e nc e ." Es s e nti a lly , pos tula te s
a a nd b s ta te th a t wh e n de ma nde r s (s up-
pli e r s ) pa y (ge t) th e i r de ma nd (s upply )
pr i c e f or e a c h ma r gi na l uni t, th e ba la nc e
of th e i r i ndi f f e r e nc e a s be twe e n de ma ndi ng
(s upply i ng) th a t uni t a nd unde r ta ki ng th e
r e le va nt a va i la ble a lte r na ti ve a c ti vi ti e s h a s
jus t ba r e ly be e n ti ppe d. In e f f e c t, de ma nd
a nd s upply pr i c e s a r e me a s ur e s of th e a l-
te r na ti ve be ne f i ts th a t de ma nde r s a nd s up-
pli e r s f or e go wh e n th e y do wh a t th e y de c i de
to do.
Equa ti on (6) a ppe a r s to c a ptur e a ll e f f e c ts
of a n e xoge nous poli c y c h a nge , z, th a t a r e
r e le va nt to our th r e e pos tula te s -a nd i nde e d
i t doe s e xc e pt wh e n th e e xoge nous c h a nge z
i n i ts e lf a lte r s th e r e s our c e s a va i la ble to th e
pi
A
I
i ni ti a l s upply
B ~
_______
IC
ne w s upply
de ma nd
0 x
Fi gur e 6.
e c onomy i n que s ti on, th e te c h nologi c a l
pos s i bi li ti e s unde r wh i c h i t ope r a te s , or th e
tr a di ng c ondi ti ons th a t i t f a c e s i n e xte r na l
ma r ke ts . So long a s th e e xoge nous c h a nge
doe s not a lte r a ny of th e s e th i ngs , a ll th a t i t
e nta i ls i s th e r e s h uf f li ng of a va i la ble r e s our c e s
a mong a c ti vi ti e s . It i s i n th i s s e ns e th a t
"s ubs ti tuti on e f f e c ts only " a r e i nvolve d i n
e xpr e s s i on(6) i ns uc h c a s e s .
T o s e e th a t (6) doe s not c a ptur e th e "i n-
c ome e f f e c ts " of c h a nge s i n r e s our c e s , te c h -
nology , or tr a di ng c ondi ti ons , le t us c ons i de r
th e mi ntur n. Suppos e , f or e xa mple , th a t th e
e xoge nous c h a nge i s th a t e mi gr a nt r e mi t-
ta nc e s , wh i c h we r e pr e vi ous ly outla we d
unde r f or e i gn c ountr i e s ' e xc h a nge c ontr ols ,
a r e now pe r mi tte d. T h e c ountr y r e c e i vi ng
th e r e mi tta nc e s c le a r ly ga i ns , e ve n i f no
di s tor ti ons wh a ts oe ve r a r e pr e s e nt i n i ts
e c onomy . He nc e (6) f a i ls to c a ptur e th e
di r e c t be ne f i t a s s oc i a te d wi th th e r e mi t-
ta nc e s , e ve n th ough i n th e pr e s e nc e of di s -
tor ti ons i t would c a ptur e th e we lf a r e
"r e pe r c us s i ons " th a t th e r e c e i pt of th e r e -
mi tta nc e s mi gh t e nge nde r .
Wh e n te c h nologi c a l a dva nc e oc c ur s , th e
r e s our c e s th us f r e e d a r e e na ble d to i nc r e a s e
tota l we lf a r e , a ga i ne ve n i f no di s tor ti ons a r e
pr e s e nt. In Fi gur e 5, th e be ne f i t f r oma te c h -
nologi c a l a dva nc e th a t r e duc e d uni t c os ts
f r omOA to OB would be gi ve n by th e a r e a
AB CD i n th e a bs e nc e of oth e r di s tor ti ons ,
a nd by th a t a r e a plus e xpr e s s i on (6) i n th e i r
pr e s e nc e . Expr e s s i on (6) would of c our s e
794 Jour na l of Ec onomi c Li te r a tur e
i nc lude th e a r e a CDEF i f a uni t ta x e qua l to
ED we r e a lr e a dy i n e xi s te nc e on X1. T h e
e xoge nous f or c e z i n (6) would i nth i s c a s e be
th e r e duc ti on i n uni t c os t (pr i c e ) of pr o-
duc i ng X1 a nd th e te r ms i n a Xi /a z would
i nc lude move me nts due to both th e i nc ome
a nd th e s ubs ti tuti on e f f e c ts of th i s pr i c e
c h a nge .
An e xa c tly s i mi la r a na ly s i s a ppli e s i n th e
c a s e of a ni mpr ove me nt i ntr a di ng c ondi ti ons
i ne xte r na l ma r ke ts . He r e a ga i na me a s ur e of
th e c ontr i buti on to we lf a r e th a t would be
e nta i le d i nth e a bs e nc e of di s tor ti ons mus t be
a dde d to (6), a nd th e a Xi /a z i n (6) r e i nte r -
pr e te d a s a bove .
I be li e ve th a t th e th r e e c a s e s me nti one d-
ne w r e s our c e s (gi f ts f r om outs i de ), ne w
te c h nology (gi f ts of s c i e nc e a nd na tur e ), a nd
i mpr ove d tr a di ng te r ms -or th e i r r e s pe c ti ve
ne ga ti ve s , a r e th e only one s f or wh i c h e s ti -
ma te d f i r s t-or de r i nc ome e f f e c ts mus t be
a dde d to e xpr e s s i on (6). It i s ve r y i mpor ta nt
to note th a t s uc h e f f e c ts a r e not ge ne r a te d by
pr i c e c h a nge s ta ki ng pla c e wi th i n th e
e c onomy unde r s tudy i n th e a bs e nc e of te c h -
ni c a l c h a nge . In th i s c a s e , unle s s th e r e a r e
di s tor ti ons , th e be ne f i ts to de ma nde r s of a
f a ll i n pr i c e a r e c a nc e lle d by th e c os ts to
s uppli e r s , a nd vi c e ve r s a i nth e c a s e of a r i s e i n
pr i c e . And wh e n di s tor ti ons a r e pr e s e nt, (6)
c a ptur e s th e i r e f f e c t. Li ke wi s e i t i s i mpor ta nt
to r e c ogni ze th a t no a ddi ti ona l te r ms h ould
be a dde d to (6) i n c a s e s wh e r e pr oduc ti on
move s f r oma poi nt on th e tr ue (oute r ) pr o-
duc ti on f r onti e r to s ome i nte r i or poi nt a s a
c ons e que nc e of th e i ntr oduc ti on of a ne w
di s tor ti on (s uc h a s a ta x on th e e mploy me nt
of a f a c tor i n s ome li ne s of i ndus tr y but not
i noth e r s ).
T h i s br i ngs to mi nd a s e c ond s ubtle ty i n-
volve d i n (6): i t i s e s s e nti a l to r e c ogni ze th a t
th e Xi r e f e r to a c ti vi ti e s , not jus t pr oduc ts .
In th e c a s e jus t me nti one d th e ta x would be
on th e a c ti vi ty of us i ng, e .g., c a pi ta l i n a
c e r ta i n s ubs e t of i ndus tr i e s -s a y th e c or -
por a te s e c tor . Di would h e r e be th e ta x pe r
uni t of c or por a te c a pi ta l, a nd Xi i ts a mount.
T h e a c ti vi ti e s of pr oduc i ng a nd c ons umi ng a
gi ve n good s h ould be ke pt a na ly ti c a lly
s e pa r a te wh e ne ve r th e di s tor ti ons a f f e c ti ng
th e m di f f e r ;8 li ke wi s e , a gi ve n ty pe of a c -
ti vi ty wh i c h i s a f f e c te d by di f f e r e nt di s tor -
ti ons i n di f f e r e nt r e gi ons s h ould be br oke n
down i nto a s ma ny s e pa r a te a c ti vi ti e s a s
th e r e a r e di f f e r e nt di s tor ti ons . Pe r h a ps th e
be s t gui de th a t c a nbe gi ve n i nth i s ma tte r i s
"i de nti f y th e r e le va nt di s tor ti ons a nd le t
th e m de f i ne th e r e le va nt s e t of a c ti vi ti e s ."
We now tur n to a br i e f li s ti ng of th e
va r i ous ty pe s of di s tor ti on. (1) T a xe s h a ve
pr oba bly be e n gi ve n s uf f i c i e nt a tte nti on a l-
r e a dy ; le t me only a dd th a t a ll ki nds of ta xe s
(i nc ome , e xc i s e , pr ope r ty , s a le s , c ons ump-
ti on, pr oduc ti on, va lue -a dde d, e tc .) f i t e a s i ly
i nto th e f r a me wor k pr e s e nte d h e r e . (2)
Monopoly pr of i ts , i n th e s e ns e of a ny r e tur n
(a bove th e nor ma l e a r ni ngs of c a pi ta l) th a t i s
obta i ne d a s a c ons e que nc e of a r ti f i c i a lly r e -
s tr i c ti ng s a le s to a poi nt wh e r e pr i c e e xc e e ds
ma r gi na l c os t s h ould a ls o c le a r ly be i nc lude d.
Note th a t f or a gr e a t ma ny a na ly ti c a l pur -
pos e s monopoly pr of i ts c a n be tr e a te d a s a
pr i va te ly -i mpos e d a nd pr i va te ly -c olle c te d
ta x. (3) T h e e xc e s s of pr i c e ove r ma r gi na l
r e ve nue i n a ny e xte r na l ma r ke t i nwh i c h th e
s oc i e ty i n que s ti on h a s monopoly powe r i s
a noth e r c a s e . T h i s i s a ne ga ti ve di s tor ti on
wh i c h c a nbe of f s e t by a nopti ma l e xpor t ta x
or by th e i mpli c i t ta x i mpos e d by a pr i va te
e xpor t monopoly . Ca te gor i e s (4) a nd (5) a r e
s i mply th e c ounte r pa r ts of (2) a nd (3) f or th e
c a s e of monops ony , th e di s tor ti on i n (4)
s te mmi ng f r ommonops ony pr of i ts , a nd th a t
i n (5) f r omth e e xc e s s of ma r gi na l c os t ove r
pr i c e i n a ny e xte r na l ma r ke t i n wh i c h th e
s oc i e ty i n que s ti on h a s monops ony powe r .
(6) Exte r na li ti e s of a ll ki nds r e pr e s e nt di s -
tor ti ons , pos i ti ve or ne ga ti ve . Polluti on of
a i r or wa te r i s a ne ga ti ve di s tor ti on, wh i c h
c ould, unde r pos tula te s a -c , be of f s e t by a
ta x pe r uni t of polluta nt e qua l to wh a t pe ople
8
Exc e pt i n th e tr i vi a l c a s e of a c los e d e c onomy or of
non-tr a de d goods , wh e r e pr oduc ti on a nd c ons umpti on
a r e ne c e s s a r i ly th e s a me .
Ha r be r ge r : Pos tula te s f or Appli e d We lf a r e Ec onomi c s 795
would be wi lli ng to pa y not to h a ve i t, or
wh a t th e y r e qui r e a s c ompe ns a ti on i n or de r
to put up wi th i t. T h e c onge s ti onof h i gh wa y s
a nd s tr e e ts r e pr e s e nts a noth e r ne ga ti ve di s -
tor ti on, wh i c h c ould i npr i nc i ple be of f s e t by
a n opti mum c onge s ti on toll r e f le c ti ng th e
e xtr a c os t (i n te r ms of ti me , f ue l, we a r a nd
te a r , e tc .) i mpos e d upon oth e r s a s a c ons e -
que nc e of th e pr e s e nc e of th e ma r gi na l dr i ve r
on th e r oa d.
Some r e a de r s ma y be i nc li ne d to que s ti on
my c la s s i f y i ng a ll ta xe s (a nd a ll monopoly
pr of i ts ) a s di s tor ti ons , only to go onto poi nt
out c a s e s wh e r e th e y c a n be us e d to of f s e t
oth e r di s tor ti ons . Wh y not ma ke s pe c i a l
c a te gor i e s f or c a s e s li ke th e opti mumta r i f f ,
opti mum e xpor t ta x, opti mum polluti on
c h a r ge , a nd opti mum c onge s ti on toll? My
a ns we r i s twof old. Fi r s t, i t i s ove r wh e lmi ngly
s i mple r to a voi d th e s pe c i a l c a te gor i e s , a nd
i ts c os t-i f a ny -i s only th e a c c e pta nc e of
th e i de a th a t di s tor ti ons c a n of f s e t e a c h
oth e r . B ut th i s i de a i s ne e de d i na ny e ve nt f or
a c ti vi ti e s wh e r e mor e th a n one di s tor ti on i s
pr e s e nt; di f f e r e nt di s tor ti ons a pply i ng to a
gi ve n a c ti vi ty c a n e i th e r r e i nf or c e , or wh olly
or pa r ti a lly of f s e t e a c h oth e r . Se c ond, by
a voi di ng s pe c i a l c a te gor i e s we h i gh li gh t th e
f a c t th a t we a r e ve r y unli ke ly to f i nd opti ma l
ta xe s a nd tolls i n a ny r e a l-wor ld c onte xt.
V
T h i s br i ngs me ba c k to my ma i nth e me : to
ple a d f or th e "c onve nti ona li za ti on" of
pos tula te s a -c . Ar gui ng i nf a vor of th e ma r e
th e f a c ts th a t th e y a r e both s i mple a nd
r obus t a nd th a t th e y unde r li e a long tr a di ti on
i n a ppli e d we lf a r e e c onomi c s . T h e y a r e
s i mple both i nth e s e ns e th a t th e i r us e e nta i ls
no mor e th a n th e s ta nda r d te c h ni que s of
r e c e i ve d e c onomi c th e or y , a nd i n th e s e ns e
th a t th e da ta th a t th e i r us e r e qui r e s a r e mor e
li ke ly to be a va i la ble th a n th os e r e qui r e d by
a lte r na ti ve s e ts of pos tula te s (i n pa r ti c ula r
a ny th a t i nvolve th e f ull-blown us e of
"di s tr i buti ona l we i gh ts ").
T h e r obus tne s s of th e pos tula te s i s a noth e r
a ttr i bute of s pe c i a l i mpor ta nc e . T h e y c a n
r e a di ly be us e d to de f i ne a s e t of poli c i e s
th a t c h a r a c te r i ze s a f ull opti mum. T h i s
e nta i ls no mor e th a n i ntr oduc i ng ta xe s , s ub-
s i di e s , or oth e r poli c i e s to ne utr a li ze di s tor -
ti ons (e .g., monopoly , polluti on) th a t would
oth e r wi s e e xi s t, s o th a t th e c ons oli da te d
Di
a f f e c ti ng e a c h a c ti vi ty a r e a ll ze r o, a nd
r a i s i ng gove r nme nt r e ve nue by ta xe s th a t
a r e tr uly ne utr a l (lump-s umor h e a d ta xe s ),'
or (c h e a ti ng only s li gh tly ) by a lmos t-ne utr a l
ta xe s s uc h a s Ka ldor 's pr ogr e s s i ve c ons ump-
ti on-e xpe ndi tur e ta x [13, 1955]. T h e
pos tula te s c a n a ls o, i n pr i nc i ple , be us e d to
s olve s e c ond-be s t pr oble ms s uc h a s f i ndi ng
th e e xc i s e ta x r a te s T , on a s ubs e t of c om-
modi ti e s X1, X2
...
Xk th a t e nta i ls th e
mi ni mumc os t of di s tor ti ons wh i le s ti ll r a i s i ng
a gi ve n a mount of r e ve nue . B ut th e s e pr ob-
le ms , ta ke n f r om th e th e or e ti c a l li te r a tur e ,
a r e li ke ly to r e ma i nte xtbook pr oble ms . T h e
pr a c ti ti one r of a ppli e d we lf a r e e c onomi c s
knows f ull we ll th a t h i s c li e nts do not c ome
to h i m i n s e a r c h of f ull opti ma or e le ga nt
s ubopti ma . He i s mor e li ke ly to be a s ke d
wh i c h of two a lte r na ti ve a gr i c ultur a l pr o-
gr a ms i s be tte r , or wh a t r e s our c e -a lloc a ti on
c os ts a gi ve n ta x i nc r e a s e i nvolve s , or
wh e th e r a c e r ta i n br i dge i s wor th i ts c os t.
And to be r e le va nt, h i s a ns we r mus t r e c og-
ni ze th e e xi s te nc e of ma ny di s tor ti ons i n th e
e c onomy , ove r wh os e pr e s e nc e ne i th e r h e
nor h i s c li e nt h a ve c ontr ol. Mos t a ppli e d
we lf a r e e c onomi c s th us a ns we r s que s ti ons
li ke "Doe s th i s a c ti on h e lp or h ur t, a nd by
a ppr oxi ma te ly h ow muc h ?" or "Wh i c h of
two or th r e e a lte r na ti ve a c ti ons h e lps mos t
or h ur ts le a s t, a nd by a ppr oxi ma te ly h ow
muc h ?"-a ll th i s i n a c onte xt i n wh i c h mos t
(i f not a ll) e xi s ti ng di s tor ti ons h a ve to be
ta ke n a s gi ve n. It i s th e f a c t th a t th e th r e e
pos tula te s a r e a ble to h a ndle th e s e ki nds of
que s ti ons , a s we ll a s mor e e le ga nt opti mi -
za ti on pr oble ms , th a t gi ve s th e m th e r o-
bus tne s s to wh i c h I r e f e r .
I
T h e be s t de f i ni ti onof a h e a d ta x i s one wh i c h mus t
be pa i d e i th e r wi th mone y or wi th th e ta xpa y e r 's h e a d!
Jour na l
of
Ec onomi c Li te r a tur e
Wh i le i t i s tr ue th a t th e r e i s no
c omple te
c or r e s ponde nc e
be twe e n wh a t i s tr a di ti ona l
a nd wh a t i s
r i gh t,
s ome
we i gh t
mus t be
gi ve n
to th e f a c t th a t no a lte r na ti ve s e t of
ba s i c
a s s umpti ons
c ome s
ne a r ly
a s c los e a s
pos tula te s
a -c to
di s ti lli ng
th e f unda me nta l
a s s umpti ons
of
a ppli e d
we lf a r e e c onomi c s
a s we know i t. T h e s e
pos tula te s
a r e r e f le c te d
not
only
i nth e
ge ne r a l-e qui li br i um
li te r a tur e
r e f e r r e d to i n f ootnote s 5 a nd
6,
but a ls o i n
th e s ta nda r d
pr a c ti c e
of down-to-e a r th c os t-
be ne f i t
a na ly s e s [s e e ,
f or
e xa mple : 20,
U. S.
Inte r -Age nc y
Commi tte e on Wa te r Re -
s our c e s , 1958].
And i t i s
h e r e , r e a lly ,
th a t
th e ne e d f or a c ons e ns us i s
gr e a te s t.
In th e
Uni te d
Sta te s ,
c os t-be ne f i t
(a nd i ts c ounte r -
pa r t, "c os t-e f f e c ti ve ne s s ") a na ly s i s
r e c e i ve d
a
ma jor
boos t wh e n th e PPB
(Pla nni ng-
Pr ogr a mmi ng-B udge ti ng) c onc e pt
wa s e n-
dor s e d
by
Pr e s i de nt
Ly ndon Joh ns on a nd
de c r e e d a s of f i c i a l
poli c y by
th e B ur e a u of
th e
B udge t.
And a t th e s ta te a nd loc a l le ve l,
i nve s tme nt
pr oje c ts
a nd
pr ogr a ms
a r e a ls o
be i ng
s c r uti ni ze d wi th a n
unpr e c e de nte d
de -
gr e e
of
c a r e , la r ge ly owi ng
to th e
i nc r e a s i ng
c onc e r n th a t
pe ople
h a ve f or e nvi r onme nta l
i s s ue s .
Mor e ove r ,
not
jus t
th e Uni te d Sta te s
i s i nvolve d i n th i s
move me nt;
th e c onc e r ns
a bout th e
e nvi r onme nt,
th e wor r i e s a bout
"wh a t we a r e
doi ng
to
our s e lve s ,"
th e
r e c og-
ni ti on th a t our r e s our c e s a r e too s c a r c e to
be wa s te d on ba d
pr ogr a ms ,
h a ve no na -
ti ona l li mi ts . T h e r e
i s , i nde e d,
a wor ldwi de
tr e nd i n
wh i c h , c ountr y by c ountr y ,
a n i n-
c r e a s i ng
f r a c ti on of th e
ke y de c i s i on-ma ki ng
pos ts
a r e
oc c upi e d by e c onomi s ts ,
a nd i n
wh i c h
i nc r e a s i ng
e f f or ts a r e
a ppli e d
to
pr o-
vi de a s ound e c onomi c
jus ti f i c a ti on
f or th e
pr oje c ts
th a t
gove r nme nts
unde r ta ke . Fi -
na lly ,
we h a ve s e e n i n th e la s t de c a de a
gr owi ng
i nvolve me nt of i nte r na ti ona l or -
ga ni za ti ons
i n th e i s s ue s to wh i c h th i s
pa pe r
i s a ddr e s s e d: th r e e
r e gi ona l de ve lopme nt
ba nks
ne wly
f or me d f or
Af r i c a , As i a ,
a nd
La ti n
Ame r i c a ; i nc r e a s i ng
r e s our c e s a r e de -
vote d
by
th e Uni te d Na ti ons
De ve lopme nt
Pr ogr a mme
to
pr oje c t
i de nti f i c a ti on a nd
de ve lopme nt,
a nd
by
th e Wor ld B a nk to
pr oje c t f i na nc i ng.
T h e OECD
[19, 1968,
1969]
h a s a ls o s h own
i nc r e a s i ng
c onc e r n i n
th i s a r e a .
T h e
de ve lopme nts
de s c r i be d a bove
s i mply
h i gh li gh t
th e ne e d f or a s e t of
s ta nda r ds ,
of
"r ule s of th e
ga me " by
wh i c h our
pr of e s -
s i ona l wor k i n
a ppli e d
we lf a r e e c onomi c s c a n
be
gui de d
a nd
judge d.
T h e th r e e ba s i c
pos tu-
la te s th a t h a ve be e nth e
s ubje c t
of th i s
e s s a y
pr ovi de
a de mi ni mi s a ns we r to th i s ne e d:
th e i r
s i mpli c i ty ,
th e i r
r obus tne s s ,
a nd th e
long
tr a di ti on th a t
th e y r e pr e s e nt
a ll
a r gue
f or th e m a s th e mos t
pr oba ble
c ommon de -
nomi na tor on wh i c h a
pr of e s s i ona l
c on-
s e ns us on
pr oc e dur e s
f or
a ppli e d
we lf a r e
e c onomi c s c a n be ba s e d.
And
s o, h a vi ng
ma de
my ple a ,
le t me
s a lute th e
pr of e s s i on
wi th wh a t
mi gh t
we ll
h a ve be e n th e ti tle of th i s
pa pe r ,
wi th wh a t
i s
c e r ta i nly
th e
ke y
th a t
poi nts
to th e s olu-
ti on of mos t
pr oble ms
i n
a ppli e d
we lf a r e
e c onomi c s ,
wi th wh a t
s ur e ly
s h ould be th e
motto of
a ny s oc i e ty
th a t we
a ppli e d
we lf a r e
e c onomi s ts
mi gh t f or m,
a nd wh a t
pr oba bly ,
i f
only
we c ould le a r nto
pr onounc e i t,
s h ould
be our
pa s s wor d:
(8*
9Xi
/ Di (z)
-dz.
z=o i dz
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"Comple me nta r i ty
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