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• 🧠 Mind Map – Modern Welfare Criteria

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  Modern Welfare Criteria MindMap

   

  📊 Infographic – Criteria, Strengths & Limits

Why “Modern Welfare Criteria” matters for UPSC Economics Optional

Welfare economics asks: How do we judge if one social state is better than another? Early economics tried to stay “value-free”, but modern issues — poverty, inequality, distribution, rights — demand criteria that handle interpersonal comparisons and ethical choices. This topic is repeatedly asked in UPSC mains because it blends positive analysis (efficiency) with normative judgments (equity/justice).

1) Pareto Optimality (Pareto Efficiency)

Core Idea

A state is Pareto optimal if no one can be made better off without making someone else worse off. It’s an efficiency concept, not a fairness concept.

Conditions (in the Arrow–Debreu general equilibrium framework)

• Marginal Rate of Substitution (MRS) equal across consumers
• Marginal Rate of Technical Substitution (MRTS) equal across firms
• MRS = MRT (efficiency in production & consumption)

Strengths

• Value-neutral (no interpersonal comparison of utility)
• Baseline for efficiency analysis

Limitations

• Too weak: many Pareto-efficient states may be highly unequal
• Cannot rank between two states where some gain and others lose
• Silent on distribution, rights, and justice

2) Compensation Principles: Kaldor–Hicks & Scitovsky

Motivation

To rank states where some are better off and others worse off — something Pareto cannot do.

Kaldor (Gainers compensate losers):

A move from A to B is socially preferable if gainers could compensate losers and still be better off, even if they don’t actually compensate.

Hicks (Losers cannot bribe gainers):

Reverse perspective: B is better than A if losers from B to A cannot bribe gainers enough to revert to A.

Scitovsky Double Criterion

To avoid the Scitovsky Paradox (A preferred to B by Kaldor, B preferred to A by Hicks), a change is accepted only if both criteria (Kaldor and Hicks) agree.

Strengths

• Operationalizable in Cost–Benefit Analysis (CBA)
• Does not require explicit interpersonal comparisons

Limitations

• Compensation is hypothetical, not actual — distribution can worsen
• Non-transitivity and reversals (Scitovsky paradox)
• Ignores rights, capabilities, and non-welfarist dimensions

3) Bergson–Samuelson Social Welfare Function (SWF)

Core Idea

Define a Social Welfare Function (SWF) as W = W(U1, U2, …, Un), mapping individual utilities to a single social index. This makes value judgments explicit and allows society to balance efficiency and equity.

Key Features

• Can be utilitarian (sum of utilities), Rawlsian (maximin), or any normative form
• Encapsulates social preferences transparently
• Allows formal welfare maximization subject to constraints

Strengths

• Explicit about ethics: you choose a SWF consistent with your value judgments
• Can handle distributional trade-offs

Limitations

• Requires interpersonal comparisons of utility
• Arrow’s theorem shows aggregation is difficult if you want to build SWF purely from ordinal preferences satisfying some fairness axioms

4) Arrow’s Impossibility Theorem

The Result

Arrow (1951) proved that no social choice rule can convert individual ordinal preferences into a complete, transitive social preference ordering while satisfying simultaneously: Unrestricted Domain, Pareto Efficiency, Non-Dictatorship, and Independence of Irrelevant Alternatives (IIA).

Implication

There is no perfect aggregation mechanism. Welfare economics cannot be purely “scientific” and must carry ethical judgments, constraints, or relaxations of Arrow’s axioms (e.g., allowing cardinal utilities, interpersonal comparisons, or domain restrictions).

5) Rawlsian Maximin Criterion

Core Principle

Under the veil of ignorance, rational individuals would choose to maximize the welfare of the worst-off group (the “difference principle”). This heavily weights equity over efficiency.

Strengths

• Focuses on justice, fairness, and social minimums
• Addresses inequalities Pareto ignores

Weaknesses

• Can be too conservative about growth/efficiency
• Which measure of “worst-off” to use? Income, utility, capabilities?

6) Sen’s Critiques, Social Choice & Capability Approach

Sen’s Criticism of Welfarism

• Utility (happiness/satisfaction) is a poor indicator of well-being (e.g., “adaptation” of the oppressed)
• Interpersonal comparisons of utility are necessary and should be allowed
• We should focus on people’s capabilities (freedoms) to achieve valuable “functionings”

Capability Approach

Welfare policies should be evaluated by how they expand individuals’ real freedoms to live the kind of life they value. This strongly influenced UNDP’s HDI, MPI, etc.

Strengths

• Goes beyond income and utility to rights and freedoms
• Incorporates inequality, deprivation, and non-market dimensions

Limitations

• Measurement challenges
• Requires value judgments on which capabilities matter

7) Other Modern Contributions (briefly)

• Harsanyi: Utilitarian SWF from rational choice under uncertainty
• Atkinson: Inequality aversion and Atkinson Index measuring social welfare loss from inequality
• Sen’s Liberal Paradox: Conflicts between minimal liberalism and Pareto efficiency
• Social choice under cardinal utilities: Relaxing Arrow’s assumptions to retrieve possibility results

8) Quick Comparison Table

9) Infographic & Mind Map

For quick revision and classroom presentation:

• 📊 Infographic – Modern Welfare Criteria (Comparison)
• 🧠 Mind Map – Core Ideas, Strengths & Limitations

10) Previous Year UPSC (Economics Optional) Questions

• UPSC 2023: “Discuss the compensation criteria of Kaldor and Hicks. How does Scitovsky resolve the paradox?”
• UPSC 2021: “What is Arrow’s Impossibility Theorem? Explain its significance for welfare economics.”
• UPSC 2018: “Explain the concept of Social Welfare Function. How does it incorporate value judgments?”
• UPSC 2015: “Critically examine the Pareto optimality criterion as a welfare standard.”

11) Probable Questions for UPSC Prelims & Mains

Mains (Analytical/Essay type)

1. “Evaluate the strengths and limitations of the Bergson–Samuelson Social Welfare Function in the light of Arrow’s Impossibility Theorem.”
2. “Is Kaldor–Hicks a satisfactory welfare criterion for public investment decisions? Discuss with reference to Scitovsky’s double criterion.”
3. “How does Sen’s Capability Approach challenge the traditional welfarist framework? Illustrate with policy implications.”
4. “Contrast the Rawlsian maximin rule with utilitarian welfare. Which is more suitable for a developing economy like India?”

Prelims (Objective/Conceptual)

1. Arrow’s Impossibility Theorem shows that:(a) Pareto efficiency cannot be achieved
   (b) No SWF can be formed without cardinal utilities
   (c) No aggregation rule satisfies a set of fairness axioms simultaneously
   (d) Utilitarianism is always superiorAnswer: (c)
2. The Kaldor–Hicks criterion:(a) Requires actual compensation
   (b) Works only for cardinal utilities
   (c) Allows potential compensation
   (d) Is identical to Pareto improvementAnswer: (c)
3. The Social Welfare Function was formalised by:(a) Marshall
   (b) Pigou
   (c) Bergson–Samuelson
   (d) RobbinsAnswer: (c)

12) Conclusion: Putting it all together for UPSC answers

Modern welfare criteria move from the “efficiency-only” Pareto world to frameworks that admit explicit value judgments (Bergson–Samuelson), recognise the limits of aggregation (Arrow), emphasise justice (Rawls) and broaden the informational base of welfare (Sen). In UPSC answers, always:

• Start with Pareto and show why it’s inadequate for real-world redistribution
• Bring in Kaldor–Hicks & Scitovsky to show applied policy relevance (CBA)
• Use Arrow to explain why “perfect” democratic aggregation is impossible
• Conclude with SWF/Rawls/Sen to show how modern welfare economics integrates ethics and policy