LOJB10286U Welfare Economics and Policy

The content of this course falls in a theoretical and an applied part. The theoretical part consists of basic welfare economic theory using utility maximization and Pareto-efficiency as a reference point for the perception that the free market maximizes welfare. Welfare is, however, only maximized in the absence of market failures and focus is at the market failures public goods, externalities and asymmetric information. Public and private efficiency-improving intervention in the market including the design of policies is discussed for each of the market failures. Common property resources are also reviewed. Second, welfare depends on the policy setting in which decisions are taken. This is addressed under political economy, focusing at the process of policy-making and the relationship between government and different interest group on a political market. Third, non-efficiency related arguments for intervention, are introduced, motivated by policy-makers concern with consequences of the income distribution generated by the market. Focus is at motivations and instruments for income redistribution and social security. Finally, the funding of public spending is considered in a public finance perspective focusing at tax theory, efficient and equitable taxation and behavior. Throughout the theoretical part, the design and consequences of various economic policy instruments will be presented and analyzed in relation to the fulfilling of government objectives and the overall efficiency of resource allocation. The applied part consists of case studies of agriculture, fisheries and environment policies, analyzing them using the instruments introduced in the theoretical part. In agriculture, government intervention terms like multifunctionality and the farm income problem are explained. In relation to policy instruments numerous agricultural policy measures are analyzed in relation to fulfilling objectives and resource allocation. On the revenue side taxes and tariffs are presented and on the expenditure side instruments like production reduction, price support and direct payments are presented. The agricultural policy-making process in the European Union is used to explain Public Choice. In fisheries, the tragedy of the commons where unregulated markets lead to overexploitation and overcapacity is reviewed. Finally, a case on water management is presented focusing at nitrogen pollution and management.