In 1920, Arthur Cecil Pigou discussed the concept for the first time and so he is considered the founder of welfare economics. Welfare Economics studies the ways, means and methods of ensuring and increasing economic welfare of the individual as well as the society.
The subject of Welfare Economics is not merely production, exchange and consumption of goods and services; but the economic well-being of persons as producers, consumers and devising ways of improving that well-being or welfare. The main tool of welfare economics, therefore is to bring the actual economy closer to ideal economy.
Satisfaction of wants promotes welfare. In the process of satisfaction of wants, an individual decides what is best for him and acts accordingly. When a person thinks what is best for him, it need not necessarily be best for the society. So, the content of term what should really govern has a social import. It aims at the adoption of a social point of view.
In welfare economics, macro view is the only relevant view, and in this, the best way of testing a welfare proposition is to test its assumptions.
There are two schools of thought regarding Welfare Economics. Both schools agree that individual’s welfare is a subjective concept consisting of his utilities or satisfaction. But, the difference is that one school regards welfare as satisfaction derived from economic goods, while the other contends that it is satisfaction derived not only from economic, but also from non- economic goods. But in practical analysis, we take only the former, keeping latter constant.
The concept of ‘social welfare’ in Welfare Economics and also its measurements are much complicated affairs. Individual welfare is a subjective concept and we can arrive at it very easily, as it is only additives of utilities. Further, the scale of preference of the individual gives ample scope to decide the state of mind, as between two combinations and thereby arrive at comparing satisfactions.
No difficulty is involved in the comparison of individual welfare, as we use the technique of individual’s choice into account. But, on the contrary, the ‘welfare of society’ is highly elusive and an abstract term. As in the case of individual, there is no tool called ‘Social Choice’ to reflect unanimous social choice.
So, the only way of making approach to define social welfare is to set down the aggregate utilities or satisfaction of all the individuals in the society.
There are different concepts of social welfare. Of these, the concept put forward by Vilfredo Pareto (1848 – 1923), the Italian Sociologist has become very popular.
According to Paretian concept, social welfare is the collective welfare of all individuals in the society. Even if one individual is better off, without no one being worse- off, the social welfare is said to have been increased.