Welfare Economics and Geography

Before embarking on the description of how the interactions of buyers and sellers in a market balance out to a stable set of prices and quantities associated with specific locations, we need to give the exercise purpose. It was intimated in the introduction that the steady state, resulting from buying and selling untrammelled by government intervention, may not always be socially desirable. In other instances it may prove, on the contrary, to be in society’s best interests. Under certain conditions the market may produce the best allocation of resources from the standpoint of society as a whole. It may, however, break down as a mechanism for achieving collective well-being. Such failures are the economically valid occasion for political intervention. The analysis of the potential gaps between market equilibria and social optima is the concern of welfare economics. Theoretically, this is a matter of trying to draw up consistent rules for deciding whether, by means of policy instruments, a change from one state to the other should be made. In practice this translates into identifying and measuring the material well-being and costs associated with the policy or investment options facing the public sector.