Question

Why is welfare a major economic challenge?

Answer 1

Two sets of policy problems in considering welfare, those arising because the system doesn’t work according to theoretical principles, and problems arising for just the opposite reason that they do work.Economic theory describes,what superficially appears to be an ideal social order of “perfect cooperation” based on mutual advantage, achieving maximum possible efficiency in the use of available resources and rational choice, and so on and so forth.The classical economists had taught that free market equilibrium would create the most efficient allocation of resources. However, reality is not so ideal and free enterprise does not in truth imply an ideal social order. Some of the major economic challenges caused by welfare is as follows:

• Imperfect market structures, such as a monopoly, monopsony, oligopoly, oligopsony, and monopolistic competition.
• Factor allocation inefficiencies in production theory basics.
• Market failures and externalities; there is also social cost.
• Price discrimination and price skimming.
• Asymmetric information, principal–agent problems.
• Long run declining average costs in a natural monopoly.
• Certain types of taxes and tariffs.

Situations are considered to have distributive efficiency when goods are distributed to the people who can gain the most utility from them.Many economists use Pareto efficiency as their efficiency goal. According to this measure of social welfare, a situation is optimal only if no individuals can be made better off without making someone else worse off.