Welfare economics in the context of "Capability approach"

In philosophy, economics, and political science, the common good (also commonwealth, common weal, general welfare, or public benefit) is either what is shared and beneficial for all or most members of a given community, or alternatively, what is achieved by citizenship, collective action, and active participation in the realm of politics and public service. The concept of the common good differs significantly among philosophical doctrines. Early conceptions of the common good were set out by Ancient Greek philosophers, including Aristotle and Plato. One understanding of the common good rooted in Aristotle's philosophy remains in common usage today, referring to what one contemporary scholar calls the "good proper to, and attainable only by, the community, yet individually shared by its members."

The concept of common good developed through the work of political theorists, moral philosophers, and public economists, including Thomas Aquinas, Niccolò Machiavelli, John Locke, Jean-Jacques Rousseau, James Madison, Adam Smith, Karl Marx, John Stuart Mill, John Maynard Keynes, John Rawls, and many other thinkers. In contemporary economic theory, a common good is any good which is rivalrous yet non-excludable, while the common good, by contrast, arises in the subfield of welfare economics and refers to the outcome of a social welfare function. Such a social welfare function, in turn, would be rooted in a moral theory of the good (such as utilitarianism). Social choice theory aims to understand processes by which the common good may or may not be realized in societies through the study of collective decision rules. Public choice theory applies microeconomic methodology to the study of political science in order to explain how private interests affect political activities and outcomes.

In welfare economics, a Pareto improvement formalizes the idea of an outcome being "better in every possible way". A change is called a Pareto improvement if it leaves at least one person in society better off without leaving anyone else worse off than they were before. A situation is called Pareto efficient or Pareto optimal if all possible Pareto improvements have already been made; in other words, there are no longer any ways left to make one person better off without making some other person worse-off.

In social choice theory, the same concept is sometimes called the unanimity principle, which says that if everyone in a society (non-strictly) prefers A to B, society as a whole also non-strictly prefers A to B. The Pareto front consists of all Pareto-efficient situations.

Economic freedom, or economic liberty, is the agency of people to make economic decisions. This is a term used in economic and policy debates as well as in the philosophy of economics. One approach to economic freedom comes from the liberal tradition emphasizing free markets, free trade, and private property. Another approach to economic freedom extends the welfare economics study of individual choice, with greater economic freedom coming from a larger set of possible choices. Other conceptions of economic freedom include freedom from want and the freedom to engage in collective bargaining.

The liberal free-market viewpoint defines economic liberty as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud, theft or government regulation. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative. There are several indices of economic freedom that attempt to measure free market economic freedom. Based on these rankings, correlative studies have found higher economic growth to be correlated with higher scores on the country rankings. Critics of this approach, such as Fredrik Carlsson and Susanna Lundström, have argued that the economic freedom indices conflate unrelated policies and policy outcomes in order to conceal negative correlations between economic growth and free-market policies, such as counting lower corruption as an indicator of economic freedom.

In welfare economics and social choice theory, a social welfare function—also called a social ordering, ranking, utility, or choice function—is a function that ranks a set of social states by their desirability. Each person's preferences are combined in some way to determine which outcome is considered better by society as a whole. It can be viewed as mathematically formalizing Rousseau's idea of a general will.

Social welfare functions are studied by economists as a way to identify socially optimal decisions, giving a procedure to rigorously define which of two outcomes should be considered better for society as a whole (e.g., to compare two different possible income distributions). They are also used by democratic governments to choose between several options in elections, based on the preferences of voters; in this context, a social choice function is typically referred to as an electoral system.

Social choice theory is a branch of welfare economics that extends the theory of rational choice to collective decision-making. Social choice studies the behavior of different mathematical procedures (social welfare functions) used to combine individual preferences into a coherent whole. It contrasts with political science in that it is a normative field that studies how a society can make good decisions, whereas political science is a descriptive field that observes how societies actually do make decisions. While social choice began as a branch of economics and decision theory, it has since received substantial contributions from mathematics, philosophy, political science, and game theory.

Real-world examples of social choice rules include constitutions and parliamentary procedures for voting on laws, as well as electoral systems; as such, the field is occasionally called voting theory. It is closely related to mechanism design, which uses game theory to model social choice with imperfect information and self-interested citizens.

Economic equity is the construct, concept or idea of fairness in economics and justice in the distribution of wealth, resources, and taxation within a society. Equity is closely tied to taxation policies, welfare economics, and the discussions of public finance, influencing how resources are allocated among different segments of the population.

In welfare economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied. The economists Richard Lipsey and Kelvin Lancaster showed in 1956 that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal. Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing one or more additional market distortions in an interdependent market may partially counteract the first, and lead to a more efficient outcome.