QUESTION ONE:

1) State and interpret the second theorem of welfare economics. What conditions must be for it
hold?

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 achieve
at a current state as well as how it is distributed. This relates to the study of income distribution
and how it affects the common good.

Other meaning;

Welfare economics uses the perspective and techniques of microeconomics, but they can be
aggregated to make macroeconomic conclusions. Because different “optimal” states may exist in
an economy in terms of the allocation of resources, welfare economics seeks the state that will
create the highest overall level of social welfare.

Some people object to the idea of wealth redistribution because it flies in the face of pure
capitalist ideals, but economists suggest that greater states of overall social good might be
achieved by redistributing incomes in the economy.

Two fundamental theorems of welfare economics;

1. The first states that any competitive equilibrium or walrasian equilibrium leads to a
pareto efficient allocation of resources (it captures the logic of Adam smith’s invisible
hand) and
2. The second theorem states the converse, that any efficient allocation can be sustainable
by a competitive equilibrium.

SECOND WELFARE THEOREM:

The second welfare theorem tells us that social welfare in an economy can be maximized at an
equilibrium given a suitable redistribution of the endowments.

Assumption of second welfare theorem;

The second theorem can be viewed as a variety of an equilibrium existence theorem with two
special properties;

(i) The equilibrium must occur a particular resource allocation.

(ii) The allocation must be pareto optimal.

The second theorem states that any pareto optimum can be supported as a competitive
equilibrium for some initial set endowments. The implication is that any desired pareto optimal
outcome can be supported; pareto efficiency can be achieved with any redistribution of Initial
wealth. However, attempts to correct the distribution may introduce distortions and so fully
optimally may not be attainable with redistribution.

The second theorem of welfare economics has certain advantages over first theorem of welfare
economics. It explains that if all consumers have convex preferences and all firms have convex
production possibility sets then Pareto efficient allocation endowments can be achieved.

Therefore, the second welfare theorem can be explained further by the Edgeworth box
elaborating the necessary conditions for it;
In the Edgeworth box diagram, the allocation A 0 is not Pareto efficient. It is possible to exchange
commodities between two individuals so as to make them both better off. The allocation A’ is
Pareto superior than A0.  Such new allocation puts both individuals on indifference curves. It is
further from their respective origins. The A2 allocation in the diagram is inversely of the
A0 allocation. It is lens shaped area and it is defined by the indifference curves through A0.
The allocation A2 is superior to A0. In the above diagram, allocation cannot cross the indifference
curves. This is because all allocations are Pareto efficient. There are different allocations in the
box diagram. The indifference curves are tangent at A 1, A3 or A4. All tangent point in the box
diagram is efficient. The indifference curves and its slope are negative. It is because of the
marginal rate of substitution.
In the box diagram, the locus cc of points of tangency between the indifference curves. Such
point is a tangency between two curves. Such points are set of all Pareto efficient allocations of
given total output. It is measured both sides of the diagram. In the exchange economy that is
barter system where goods are exchanged for goods, the consumers have fixed endowments of
consumption goods. The efficient consumption conditions are required for the Pareto efficiency.

In the box diagram, each allocation and point generates the utility combinations. Such utility
combinations are written as (u1, u2). The Pareto efficient allocations on the curve cc would
generate utility combinations. Such utility combinations of the individuals are considered as
utility frontiers. The inefficient allocations would generate combinations inside the utility
frontier.
Also; according to the pareto efficiency graph;

Pareto efficiency graph

For example, on the graph above if initial endowments yield point A and our social welfare
function prefers point B, we can impose a lump-sum tax on individual 2 and give it to individual
1 to induce this shift in the resulting equilibrium. (Feldman, A.M. and Serrano, R. 2006)

Based on the fundamental theorems and our measure of social welfare, we have established a
role for government, but it is a very limited one: imposing lump-sum taxes and transfers to
choose the socially optimal point among Pareto optima. (Feldman, A.M. and Serrano, R. 2006)

Implication of the theorem;

The implication is that any desired pareto optimal outcome can be supported; pareto efficiency
can be achieved with any redistribution of initial wealth.

The second fundamental theorem of welfare of economics, any efficient allocation can be
attained by a competitive equilibrium, given the market mechanisms leading to redistribution.
This theorem is important because it allows separation of efficiency and distribution matters.
QUESTION TWO:

2) Describe the growth of public sector expenditure in Tanzania over the last century. Does it
improve the welfare of the Tanzanian?

PUBLIC SECTOR EXPENDITURE:

Is the and bodies attached to them on collective needs and wants such as pension, provisions
security, infrastructure, spending made by the state, social security administrations, local
authorities and the administrations etc.

However, the public sector is crucial to the economy of a country, since its expenses speed up
economic growth and sustain the stability. Hence making it an important tool of the economy
(khadka, 2002). After the great depression of 1930s, economists came on the conclusion that
government expenditure is necessary in the economy. Public expenditure has now-a-days
enormously increased due to the intensive and extensive expansion of activities of the state

So far public expenditure has its causes as to why a specific country would try to carry out some
expenses, it is a break through as to why a country spends which can go far beyond that does the
country’s government put forward its citizen’s welfare or its own.

Therefore, the following are the main factors/causes which have contributed to the increase
in the government expenditures are as under:
(i) Increase in Defense Expenditure:
Practically every country of the world now is spending large quantity of money on preparing for
a war or for its prevention. The countries are feverishly engaged in producing costly war
material. The air to air missiles, the jet aero planes, hydrogen bombs, tanks, submarines, F-16,
etc., cost huge amounts of money to the exchequer. We conclude, therefore, that the main factor
which has contributed to the enormous increase in the public expenditure is the ever increasing
armament race which is going on in almost every country of the world.
(ii) Expansion of Government Functions:
Increase in public expenditure is also due to the keen interest which governments are taking for
the 
welfare of their citizens. Every government is spending large sums of money on construction of
roads, hydro-electric projects, buildings, hospital, canals and other public works programs. It is
also spending huge amounts of money for providing education, housing facilities, public parks,
libraries, museums, medical aid, etc. etc.
(iii) Backward Area and Increase in Population:
Another reason for the growth of public expenditure is that the modern governments with the
limited resources at their disposal have brought under control the neglected parts of their
territories. The governments are spending vast sums of money for raising the standard of living
of the people hitherto, living in the underdeveloped areas. The increase in expenditure is also due
to the fact the population is increasing at a fast speed. The welfare states of today, therefore, have
to meet the needs of people living in their countries. The increase in public expenditure is,
therefore, inevitable.
(iv) Higher Price Level:
Public expenditure has increased because of the higher price level in almost every country of the
world. The government has now to spend increased amounts of money on the purchase of
commodities and services. The public' expenditure is, therefore, bound to go up.
(v) Increase in Public Revenue:
The most important factor which has contributed to the expansion of public expenditure is the
increase in public revenue. Since the Industrial Revolution, there has been continuously taking
place an increased use of heavy plants and complex machinery. The per capita income of the
people has gone up. As the taxable capacity of the people has increased, so the revenue of every
state has also increased. With the rise in public revenue, the government expenditure is surely to
go up.
(vi) Duplication of Expenses:
Some increase in public expenditure is also due to the fact that government is sometimes
wasteful and extravagant in its expenditure. Duplication of government expenditure is not
uncommon to any one of us.
Therefore, the following are the contribution of the increase in public sector expenditure
towards the improvement of welfare of the Tanzanian citizens;

UNDER EDUCATION SECTOR;

This so far one of the sector that has increase the welfare of the Tanzanians in the increase of its
expenditures.

In 2014 the government of Tanzania introduced a fee-free education policy, making pre-primary
and primary education free, waving all registration and exam fees that parents had to pay in the
past and posed a significant financial barrier. Today the policy is being implemented to which it
has contributed to the vast increase in the demographics of student’s enrollment in primary
school of about 7,124 pupils per school.

This has increase the livelihood of the parents who did not have means to pay for their children’s
education, to which the government has bared that burden by leaving enough room for the
parents to rebuild their individual economies so as to increase their standard of living.

UNDER FOOD AND AGRICULTURAL SECTOR;

The agricultural sector contributes about 28% of the country’s GDP and about 24% of the total
exports, and ensures food security in the country. Hence, its expenditure contributes to the
welfare of the majority by creating employment of a larger population of individuals about 80%
of the work force. Therefore, due to its increased expenditure it forms a wide basis for food and
nutrition security and provide raw materials for industrialization. Thus, increasing the welfare of
the majority of citizens in Tanzania.

UNDER HEALTH SECTOR;

The Government health spending has grown but at a decreasing rate, so the social welfare was
not met in this sector.

Health expenditures have grown but more slowly than the growth rates of general government
revenue and general government Health expenditures have expenditure. While growth in
government health spending has slowed considerably, growth in revenue and general
government spending (GGE) has stabilized at around 14 percent annually. The result of this
trend is that the health sector has effectively been deprioritized. As a share of general
government spending, health now constitutes around 6 percent, about 3 percentage points less
than in 2010

Health spending is insufficient to achieve universal health coverage and is below major
international benchmarks. Government percent of GGE (General Government Expenditure),
Tanzania spends less than half the 15 percent to which it committed in the African Union’s
Abuja declaration. Furthermore, government health spending is estimated to be only 2.5 percent
of GDP (Growth Domestic Product), which is about half of the notional target of 5 percent that
would be necessary to achieve universal health coverage and has dropped by a percentage point
since 2010. One modest international benchmark estimates the total per capita financing need for
universal health coverage to be at least US$86, 27 which is still much higher than current
spending in Tanzania. Therefore, there is an urgent need not only to protect the current limited
health spending but also to explore opportunities to expand the fiscal space available for health
care.

UNDER TRANSPORT AND INFRASTRUCTURE SECTOR;

The transportation sector plays a crucial role in the growth of the Tanzanian economy; it
facilitates both domestic and international trade, contributes to national integration, and provide
access to jobs, health, education and other essential facilities. The increase in transport sector
expenditure has so far increased the effectiveness and accuracy in the provision of services
which contribute to a great deal to the successful implementation of socioeconomic activities, the
lowering of domestic production costs through timely delivery, and the enhancement of the
economies of scale in the production process and creating economic opportunities.

In the past five years, the transport sector in Tanzania has helped to integrate market-
strengthening competition increase access to farming techniques, promote trade, tourism, and
foreign investment, and has contributed to the government revenue. The Tanzania transport
sector’s increase in expenditure has contribute to the overall economic performance (with a GDP
growth of 6.9% in 2005 and an expected 7.9% by 2008), hence contributing to the vast increase
in social welfare.
REFERENCE;

Feldman, A.M. and Serrano, R. 2006. Welfare Economics and Social Choice Theory, 2nd edn,
New York, Springer.

Marshall, A. 1920. Principles of Economics. 8th edn, London: Macmillan, ch. VI. Maskin, E.
1999. Nash equilibrium and welfare optimality. Review of Economic Studies 66, 23-38

Pigou, A.C. 1920. The Economics of Welfare. London: Macmillan, Part II.

Kapunda, S, M and Topera, J, S (2013), Public Expenditure Composition and Economic Growth
in Tanzania: Socio- Economic Policy Implications. Asian-African Journal of Economics and
Econometrics, Vol 13, No1, 2013: 61-70.

Kapunda, S. M. and D. A. K. Mbogoro (1989), “The Economic and Industrial Development in

Tanzania”