Question

i. Arthur Cecil Pigou (1877-1959) presented the concepts of private interest, social benefits, private marginal cost and social marginal cost. Explain each of these concepts.
ii. In current context, what is Pigou's recommendation to fix 'market failure'?
iii. Explain the difference between Pareto's and Pigou's economic analysis.

Answer 1

(i) Private interest; private interest is dominated in market decision making. The interest of private individual who is a part of business sector whereby gains benefits, privilege, exemption or advantage from the action of state agency which is not available for public.

Social benefit is the summation of all private individual benefits and the external benefits of production or consumption. The graphical representation of the social benefit shows a downward sloping diagram. The social benefit can be acquired through subsidies which introduced by the government.

The marginal private cost is change in total cost with respect to the production of additional cost incurred by one unit. This private cost includes explicit and implicit cost by the firms which exclude the external cost.

Social marginal cost measure the cost incurred by the society through producing an extra unit of product. Marginal social cost = marginal private cost + marginal external cost.

(ii) The prima facie case of Pigou recommended the market failure fixation in the economy. Evaluating the private and social net products can be used here. If the demand for labour exceeds; the prima facie can be used to increase the employment and national output. This will reduce the market failure.

(iii) The Pareto’s explanation about economic activity states that the improvement due to a change in allocation harms no one and better for at least one. Pareto efficiency is does not a necessarily result of the socially desirable distribution of resources. Pareto efficiency is used to find the welfare maximisation criteria. It finds the summation of utilities of all agents in the economy;

Wa (x) = i=1nai ui (x)

Pigou’s economic analysis find the cost imposed or benefits conferred on others which are not accounted by the person who create the cost or benefits. This effect will measure the change in output with respect to the investment. Pigou tried to find the social benefit and the social cost with respect to change in the economy. This economic change will be based on the utilities gained by each social agent.