Welfare economics

A consumer having a limited income at his/her disposal must make choices. He can certainly not afford to buy unlimited quantities of all goods and services he finds desirable. Similarly, societies must make choices of how to use their scarce resources of labour, capital, natural resources, and so on. At any point of time the total amount of resources can be considered as fixed, implying that we are automatically faced with the fact that trade-offs must be made. If we ask for more of one thing, it usually means less of something else. In addition, any such change may affect millions of households so that one can safely assume that there are both those who gain and those who lose from the considered change. This raises the question whether we can say anything about the desirability of a change in the many cases where there is no unanimity.

A distinction is usually made between analysing the consequences of a change and making judgements concerning the desirability of particular changes or policies. The former kind of analysis is called positive economics, while the latter is referred to as normative economics. We can use tools such as demand and supply curves to describe the effects of a policy change, such as a proposed tax on cigarettes. For example, we may want to examine how the market price and the market demand are affected by the tax, if introduced, and how the tax affects poor and rich people. These are examples of the kind of questions positive economics is concerned with.