Question

Identify the main problem generally with using utility as the measure of individual welfare in social welfare analysis.

Answer 1

The main problem generally with using utility as the measure of individual welfare in social welfare analysis are -

Welfare economics focuses on the optimal allocation of resources and goods and how the allocation of these resources affects social welfare. This relates directly to the study of income distribution and how it affects the common good. Welfare economics is a subjective study that may assign units of welfare or utility to create models that measure the improvements to individuals based on their personal scales.

Welfare economics uses the perspective and techniques of microeconomics, but it can be aggregated to make macroeconomic conclusions. Some economists suggest that greater states of overall social good might be achieved by redistributing income in the economy. Welfare economics uses the perspective and techniques of microeconomics, but it can be aggregated to make macroeconomic conclusions. Some economists suggest that greater states of overall social good might be achieved by redistributing income in the economy.

Utility refers to the perceived value associated with a particular good or service. The perceived value is intrinsic and relates to whether a buyer feels the amount of value received for a certain good or service is at least equal to or greater than the amount of funds required to purchase it. Additionally, it suggests that a certain unit of currency, such as a dollar, has the same perceived value to an individual as it does to a corporation, regardless of how the income amounts of each entity differ.

The concept, however, is not without problems. First, it is unclear exactly what utility is or is not. Is it satisfaction? Happiness? This ambiguity leaves many modelers uncomfortable. Also problematic is the representative consumer assumption necessary to aggregate from an individual utility function to a social utility function (or from an individual demand curve to a market demand curve) in macroeconomic models. Does a social welfare function exist? Another issue is that aggregating to a representative consumer abstracts from many important questions about income distribution. A final point is that utility maximization may not accurately model the outcome of consumer decisions. And the assumptions underlying this procedure may also seem unreasonable.

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