Chapter Info (Click Here)
Book No. – 3 (Economics)
Book Name – Principles of Microeconomics (HL Ahuja)
What’s Inside the Chapter? (After Subscription)
1. Theory of Social Choice
1.1. Arrow’s Conditions of Social Choice
1.2. Arrow’s Impossibility Theorem and Voting Paradox
1.3. Arrow’s Consequences
1.4. Amartya Sen on Arrow’s Impossibility Theorem and Social Choices
2. Role of Government and Government Efficiency
2.1. Imperfect Competition and Monopoly
2.2. Existence of Externalitites
2.3. Imperfect Information
2.4. Public Goods
2.5. Equity in Income Distribution
3. Government Inefficiency
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Social Choice, Role of Government and its Inefficieny
Chapter – 38
An important function of the government is to provide goods, services, and policies that are desired by society.
A society consists of many individuals, and each individual possesses a distinct pattern of preferences, choices, and likings.
Because individuals differ in their preferences, determining what society as a whole wants becomes a problem of social choice.
The process of making a social choice requires the aggregation of individual preferences into a collective decision that reflects society’s preferences.
Aggregating individual preferences into a single social choice is not straightforward and involves several difficulties and complications.
The problem of social choice therefore arises from the challenge of converting diverse individual preferences into a collective societal decision.
Theory of Social Choice
The problem of social choice was extensively analysed by Kenneth Arrow in his influential work Social Choice and Individual Values.
Arrow argued that constructing a social welfare function that accurately reflects the preferences of all individuals in a society is an impossible task.
His central contention was that it is extremely difficult to devise reasonable and democratic procedures for aggregating individual preferences into a collective social preference that can be used for making social choices.
Arrow proved a general theorem showing that it is impossible to construct a social ordering that simultaneously and satisfactorily reflects the individual orderings of all members of society.
In the original Bergson-Samuelson social welfare function, an individual’s welfare was assumed to depend solely on the goods and services consumed by that individual, independent of the consumption of others.
Under this approach, an individual’s ranking of alternative social states reflected only his personal tastes and preferences.
Arrow challenged this view by arguing that an individual’s ordering of social states depends not only on private consumption but also on the availability of various collective goods and activities, such as:
Municipal services.
Public parks.
Sanitation facilities.
Erection of statues of famous persons.
Other collective or public activities.
According to Arrow, the welfare effects of collective activities cannot be evaluated solely on the basis of an individual’s personal consumption.
An individual’s ranking of alternative social states is influenced by:
His own level of consumption.
The consumption and welfare of others in society.
His broader social and ethical evaluations.
Such rankings of social states embody an individual’s value judgements, which Arrow simply refers to as values.
Arrow maintained that for constructing a valid social welfare function, what must be considered is the ordering of social states based on individuals’ values, rather than merely their private tastes and consumption preferences.