Public Finance Essay Example | Topics and Well Written Essays - 2000 words

Public Finance - Essay Example It would also include government’s initiative and legal foundations established for such programs. The second part would be dealing with the effect of such welfare payments and programs on the labour supply decisions, and the last part would consist of the economic theory for explaining the effect of labour supply incentive of these social welfare programs, which is designed for the low income household. Empirical evidence would be also included to support such viewpoints. In order to understand the concepts of welfare payments and its relation to labour supply, firstly one needs to understand the concepts of welfare economics. Welfare economics utilises the perspectives and procedure of microeconomics, but the concepts can be exploited to derive macroeconomics assumptions. It assists in analysing and measuring social welfare, in terms of the economic society. The concept of welfare economics lays down welfare improvement framework in term of Pareto efficiency. The two convent ional approaches in welfare economics are: a) The New Welfare Economics Approach, and b) The Neoclassical Approach. Neoclassical approach was formulated by Marshall, Edgeworth, Pigou and Sidgwick. This theory assumes that utility is a scalable measure by judgement or observation. The preferences are stable and the additional consumption would increase the utility successively. This concept is also known as diminishing marginal utility. However, the new welfare economic theory is based on the studies of Parato, Kaldor and Hicks. This theory specifically explains the difference between the efficiency aspect and the distribution aspect of a discipline. The criteria of efficiency are treated with Parato’s efficiency and the compensation tests of Hicks-Kaldor. The concepts of welfare economics would be included in the study to understand the concepts of social welfare. Let us understand it with the help of utility function, which can also be derived from points on the contact curv e. So abundant utility functions can be derived from the production possibility curve, stated in figure 1. Figure 1 Figure 1 is a combined graph which would explain the efficiency between consumption and production and also include the ingredients of maximising social welfare. Each point on the curve represents the allocation of efficiency of the economic resources. It is Pareto optimum in the factor allocation, in consumption, in the interaction and in production. The curve MN represents a social utility frontier curve. Point D on the MN curve corresponds to Point C. Point D lies on the social utility frontier, as the marginal rate of substitution (MRS) of C is equal to the MRS of A. Similarly Point B corresponds to point E and both of them lie within the social utility frontier, which signifies inefficiency. This is because the MRS at C is not equal to Marginal rate of transformation (MRT) at point A. Although this was Pareto’s way of presenting the points of efficiency, bu t there is one point where the social welfare has maximized and that point can also be called as the point of bliss. This point is Z, where the MN curve is tangent to the highest possible indifference curve. After discussing welfare economics through graphical representation, the basic concepts of providing welfare payments to the low income households, would be studied. The term welfare is used to denote minimum level of social support and wellbeing for all