Introduction to Welfare Analysis

When studying markets, economists not only want to understand how prices and quantities are determined, but they also want to be able to calculate how much value markets create for society. Economists call this topic of study welfare analysis, but, despite its name, the subject doesn’t have anything directly to do with transferring money to poor people.

Economic value created by a market accrues to a number of different parties.

It goes to

consumers when they can purchase goods and services for less than they value the use of the items
producers when they can sell goods and services for more than each item cost to produce
the government when markets provide an opportunity to collect taxes

Economic value is also either created or destroyed for society when markets cause spillover effects for parties not directly involved in a market as a producer or a consumer (known as externalities).

In order to quantify this economic value, economists simply add up the value created for all of the participants in (or onlookers to) a market.

via Introduction to Welfare Analysis.

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