There are two main approaches to welfare economics: the early neoclassical approach and the new welfare economics approach. The early approach assumes cardinal utility can be measured, while the new approach uses ordinal utility and Pareto efficiency. Perfect competition occurs when many small buyers and sellers trade homogeneous goods, while imperfect competition arises when firms have some control over prices through monopolies, oligopolies, or natural monopolies sanctioned by governments. Imperfectly competitive markets can result in inefficiencies like deadweight loss compared to perfectly competitive markets.

1. •Contents:
•What is social welfare in Economics.
•Two approaches of social economics
•Perfect & Imperfect competition.
•A Perfection Benchmark to the rescue.

2.  Welfare economics is a branch of economics that uses
microeconomic techniques to evaluate economic well-being,
especially relative to competitive general equilibrium within
an economy as to economic efficiency and the resulting
income distribution associated with it.
 Social welfare refers to the overall welfare of society. With
sufficiently strong assumptions, it can be specified as the
summation of the welfare of all the individuals in the society.
Welfare may be measured either cardinally in terms of
"utils" or dollars, or measured ordinals in terms of Pareto
efficiency.

3.  The cardinal method in "utils" is seldom used in pure
theory today because of aggregation problems that make
the meaning of the method doubtful, except on widely
challenged underlying assumptions. In applied welfare
economics, such as in cost-benefit analysis, money-
value estimates are often used.

4.  There are two mainstream approaches to welfare economics:
the early Neoclassical approach and the New welfare
economics approach.
 The early Neoclassical approach was developed by
Edgeworth, Sidgwick, Marshall, and Pigou. It assumes that:
Utility is cardinal, that is, scale-measurable by observation or
judgment.
 Additional consumption provides smaller and smaller
increases in utility (diminishing marginal utility).

5.  The New Welfare Economics approach is based on the
work of Pareto, Hicks, and Caldor and Prof. T Scitovsky.
 It explicitly recognizes the differences between the
efficiency aspect of the discipline and the distribution
aspect and treats them differently.
 Questions of efficiency are assessed with criteria such as
Pareto efficiency and the Kaldor-Hicks compensation
tests, while questions of income distribution are covered
in social welfare function specification.

6.  Further, efficiency dispenses with cardinal
measures of utility, replacing it with ordinal
utility, which merely ranks commodity bundles
(with an indifference-curve map, for example).
Scitovsky derived a third version to the
'Compensation Principle' in his novel 'A note on
the Welfare Proposition in Economics' called the
Scitovsky Paradox or Reversal Test.

7.  PERFECT COMETITION:-
 perfect competition describes markets such that no
participants are large enough to have the market power
to set the price of a homogeneous product. Because the
conditions for perfect competition are strict, there are few
if any perfectly competitive markets.
 Still, buyers and sellers in some auction-type markets,
say for commodities or some financial assets, may
approximate the concept. Perfect competition serves as
a benchmark against which to measure real-life and
imperfectly competitive markets

8. 1. Large number of buyers and sellers.
2. Homogeneous product.
3. Free entry and exit of firms.
4. Perfect knowledge.
5. Perfect mobility of the factors of
production.
6. Absence of transport costs.
7. Government non-intervention
8. Only one price

9.  Markets or industries with two or more sellers and buyers that
fail to match the criteria of perfect competition.
 The most noted examples of imperfect competition are the two
market structures with selling-side control--monopolistic
competition and oligopoly. Lesser known market structures
with buying-side control--monopsonistic competition and
oligopsony--are also considered as imperfect competition.
 Facing no competition, monopoly and monopsony are not
included. Most real world markets can be considered imperfect
competition.

10.  Imperfect competition is the general term
for competitive markets that do not match
the criteria of perfect competition. They are
competitive, but they are imperfect. Market
structures with no competition--monopoly
and monophony--are excluded

11.  This is where the benchmark of perfect competition
is most important. By comparing specific, real
world, imperfectly competitive markets with perfect
competition, the degree of inefficiency can be
indicated. If a monopolistically competitive market
has a price of $10,001 and a quantity of
9,999,999, while the comparable price and quantity
for perfect competition are $10,000 and
10,000,000, then inefficiency exists, but the
problem is relatively small. Undertaking imperfect
corrective government actions is likely to make
matters worse.

12.  In contrast, if an oligopolistic market has a price and quantity
of $20,000 and 5,000,000, compared to a price and quantity
for perfect competition of $10,000 and 10,000,000, then
inefficiency also exists, and this inefficiency IS DEFINITELY
more severe. Even imperfect corrective government policies
have a good chance of improving upon this inefficiency.
 In real world, inefficiency problems and the need for corrective
government policies are extremely diverse. And with this
diversity comes differences of opinion and controversy. In
fact, a number of the more interesting economic discussions
involve questions about what, if any, actions government
should take to correct the inefficiencies of imperfect
competition.

13.  Imperfectcompetition is when a firm has too
much control over the market of a particular good
or service and can therefore charge more than its
market value. When the market for a certain
good or service doesn't have very many
competitors, the sole or few firms control the
market.
 For example, suppose you need to get gas and
the only place around is XYZ corporation and
you don't have enough to get to the next station.
They can charge you more than the market
value, even $10 per gallon, because there's no
competing gas station that you can buy from
instead.

14.  Some forms of imperfect competition are good for society.
One of these is a "natural monopoly"; this occurs when the
government grants a certain company sole market power
over a specific area for a certain service.
 The government does this for services when the marginal
costs of providing the particular service are really high with
just a few customers; because of this, the government
ensures that the particular company has enough customers
to drive down the company's average costs without having to
charge too low of a price so that they'll still find it profitable to
provide the service.
 Otherwise, if companies stand to lose more than gain, certain
services will be under-provided. For example, you may have
noticed that most people where you live all use the same gas
and electric company. That's an example of a desirable
situation of imperfect competition.

15. There are different ways of defining perfect competition : however, for our
purposes in this chapter, we can pick out two important features:
(a) all agents are price takers,
(b) prices adjust to equate desired supply and demand.
 When we say that agents are price takers, we mean that they treat the
„market price‟ as given, they believe that they have no ability to influence
the market price. Thus, when perfectly competitive firms decide how
much output to produce, they treat the price as given and choose the output
that equates supply with demand. This decision defines their supply
function, which tells us how much they wish to supply at different prices.
 Similarly with consumers in deciding demand. When we say that prices
adjust to equate supply and demand, we mean that the market price is
determined (somehow!), at the point where the supply and demand curves
intersect at point E in

16.  Figure, at price p* and quantity x*. One of the most
important points to note about the competitive equilibrium
is that it is in some senses a socially optimal outcome (in
 the absence of externalities etc.). In particular, we can
say that it maximize s the sum of consumer and
producer surplus or more simply maximize s total surplus

17.  Figure, at price p* and quantity x*. One of
the most important points to note about the
competitive equilibrium is that it is in some
senses a socially optimal outcome (in the
absence of externalities etc.).
 In particular, we can say that it maximize s
the sum of consumer and producer surplus
or more simply maximize s total surplus

18.  To see this, note that if we consider the competitive
equilibrium in Figure, the producer surplus, which is best
thought of as profits, is given by the area between the
horizontal price line p=p* and the supply curve, represented
by the triangle between points ABE.

19.  The consumer surplus is given by the triangle
ACE, the area between the demand curve and the
horizontal price line p=p*. Total surplus is then the
triangle BEC.
 From the point of view of social welfare, the net
gain to an additional unit of output is the vertical
distance or „gap‟ at that output between the
demand curve (which represents the marginal
value of output) and the marginal cost curve
(which represents the marginal cost of output): at
xa this gap is GF.
 The total loss in surplus when we compare xa to x*
is the triangle GEF.

20.  Now let us consider an imperfectly competitive
equilibrium, for example a monopoly. A
monopolist will set its price as some mark-up over
marginal cost.
 For example, assume the profit maximizing price
of the monopolist is pm , with resultant output xm.
As can be seen if we compare Figure a and
Figure b, the monopoly outcome involves a loss
in total surplus as compared to the competitive
outcome: the net gain in producer surplus to the
monopolist is more than offset by the loss of
consumer surplus.

21. The total loss is the triangle GEF in Figure b, which is
often called the „social cost of monopoly‟. Thus if we
compare the monopoly outcome to the competitive
outcome, we observe that in comparison to the
competitive outcome (a ) the level of economic activity
is lower, and (b) the level of welfare is lower.
 However the difference does not end there: if for
some reason the output is increased beyond xm, then
of course total surplus will increase. For example, if
output increases to x in figure b, then the gain in total
surplus will be the shaded area GFKJ. Thus if we start
from an imperfectly competitive equilibrium, then an
increase in output will increase welfare.

22.  Hence we can see that there are two fundamental
differences between the perfectly competitive
equilibrium and the monopolistic equilibrium.
 First,the monopolistic equilibrium involves a
lower level of welfare than the perfectly
competitive equilibrium.
 Second starting from the monopolistic
equilibrium, an increase in output increases
welfare, a reduction reduces welfare.

23.  Whilst the analysis of this section has been
cast in terms of simple microeconomics, its
lessons will carry over into macroeconomics.
 The extra dimension added in
macroeconomics is that the approach is
general equilibrium: we have to consider
equilibrium of all of the markets in the
economy, and how they interact

24.  To get More of Social welfare in
Economics please refer to book “Economic
Efficiency & social welfare”
By E.J. Mishan.
THANK YOU.