welfare economics The part of economics concerned with the effects of economic activity on welfare. This includes the modelling of individual or household behaviour by utility functions; criteria for efficiency, including
Pareto-optimality and theories of the
second-best; criteria for judging whether changes in the economy are beneficial; consideration of how income distribution affects social welfare; and
cost-benefit analysis of activities involving
externalities. Welfare economics is largely synonymous with normative economics: it does not include study of the institutions, as distinct from the objectives, of the welfare state.
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