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.