Pigovian approach, Public Economics

PIGOVIAN APPROACH 

Pigou assumed  that  the aim  of  social policy is  to  'promote welfare'. But  in order to simplifL  this, he chose to restrict the range of his inquiry to 'that  part of social welfare  that  can be  brought  directly or  indirectly  into  relationship with  the measuring rod of money'. He  therefore suggested  that, "this part  of welfare may be  called economic welfare". For an  individual, Pigou identified economic welfare  with  satisfaction  by  assuming expected  and realised Welfare Economics  satisfaction from economic activity  to  be equal except  in  the case  of  the saving decision. 

Pigou had assumed measurability and interpersonal comparison of utility, and had  drawn some conclusions  from  the  premise that aggregate social utility ought to be maximised. He explained this through the concept of 'ideal output or ideal allocation'. 

For Pigou, a  situation  'in which each several sort of resource  is allocated  in such a way that the  last unit of it  in any one use yields a physical product of the same money value as  the  last unit of  it in any other use'  is one  of  ideal allocation, irrespective of  the distribution  of  money incomes.  If it  is  a community comprising  rich  and poor people, then  'though  it  is  true  that aggregate satisfaction can  be  increased  by  departures from this  type  of allocation in ways deliberately designed to benefl poor people,  it  is probable that departures taken at random,  e.g.,  through  the  operation of monopoly power, would diminish aggregate satisfaction'. Therefore, according to Pigou, such an allocation is properly called the ideal allocation with respect  to  the existing distribution of money income. 

Posted Date: 10/26/2012 5:46:47 AM | Location : United States







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