APPLICATIONS OF WELFARE ECONOMICS
We know that welfare economic analysis is intended to enable the economist to make policy commendations so that social welfare is maximized Such recommendations may cover the diverse idles of the economy Hence policy implications of welfare economics can be numerous. We shall just tick up a few prominent ones. Pricing Policy of Public Undertakings. The pricing policy of public undertakings occupies an important place in a mixed economy The price and output policy of such undertakings must be such as to maximize welfare. The optimal pricing will be one which makes prices marginal cost ratio equal to the average prevailing elsewhere. When the marginal cost is zero there is a imam face case for rendering the service free. This is especially the case when there is some investment heck and losses can be covered other than by marginal taxation and in and equitable manner. When average costs are considerably higher than the marginal cost. which is not small the price charged hold to be less than the average cost But where it is possible to finance losses then there is a strong case for educing prices below average cost These undertakings should at least aim at covering total cost.
International Trade There is no doubt that trade policies. free trade or protectionist. hive welfare implications If the post trade position Actually better than the per trade position and if the distribution of real income is not adversely affected opening of international trade will increase welfare
. In a world of pure competition. imposition of a tariff results in allocation of resources and in a reduction in net social welfare when all concerned nations are taken together. It is assumed that the per-tariff allocation of resources was optimal. Imposition of tariff will affect prices and result in reallocation of resources which must be presumed to reduce welfare. The tariff levying country can gain but only at he cost of other nations. However from the point of view of backward country free trade is not ideal. Free trade maximizing welfare presupposes optimum conditions of production and exchange i thin countries which is unrealistic.
