Discuss the contribution of A.C Pigou in the field of welfare economic.
⇒Professor A.C Pigou developed the first systematic theory of welfare economics by his book “The Economic of welfare economics by his book “The Economic of Welfare (1992)”.
Concept of welfare:
According to Pigou an individuals derives certain satisfaction when he consumes certain goods and services and this is his/her individual welfare. The social welfare is thus nothing but the aggregate of the satisfactions of all individuals which constitute social welfare. Pigou’s idea of welfare is associated with economic welfare only. According to him economic welfare is restricted to only that part of general welfare that can be brought directly or indirectly into relation with measuring rode of money.
Assumption of welfare economics:
Pigou assumed the following assumption in his welfare economics-
a. Each consumer attempt to maximize his satisfaction out his expenditure
b. Utilities through not measurable strictly in cardinal change are comparable both inter personally and intra personally (Ordinality assumption)
c. Man/woman place in identical circumstances would derived the same satisfaction out of the same real income.
d. He assumed diminishing marginal utility of money.
Social optimum:
According to Piguo economic welfare of the society increases when there is increase in the national income & vice versa, other things remaining the same. In real sense an increase in the output of goods and services in a country increases greater satisfaction from the increase output of goods and services. Thus the first condition of economic welfare is the increase of national income by optimum utilisation of resources.
The second condition for the maximization of economic welfare is a perfectly equal distribution of money income in society. Thus wealth or income should be transferred from the rich people to the poor which increase economic welfare of society.
Private and product & social net product:
Pigou distinguish between PNP & SNP refers to the income which accrues to the owner of a private business enterprise. SNP refers to the contribution made by that enterprise to the national divident according to him in an economy sometimes PNP>SNP or PNP < SNP. For example a factory producing some marketable commodity may produce smoke as an incidental by product which may not only spoil the cloth of accident of the area, but also inflict serious harm on their physical & mental health. Hence here PNP is greater than SNP like wise in some other situation PNP is less than SNP. Pigou view that the state should actively intervene to eliminate the divergent between PNP & SNP. Where there is equally between PNP and SNP, if promote the economic welfare of the community.
Ideal output:According to him, social optimum would stand realised or the output in the economic would be ideal if the marginal social products in all the industries are equal to each other. In other words, the national dividend in the economy would be the highest if the values of marginal social products of all industries are equal to each other.
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