Two extensions of consumer surplus

We study consumer surplus in a single market when (a) there is a lower bound in the consumption of the outside good and (b) the weights in the social welfare function given to consumers and firms are different. We assume quasilinear utility. When the lower bound constraint on the consumption of the outside good is binding, income effects arise in demand. In some cases, Cournot equilibrium output is below equilibrium output without this constraint because the constraint makes demand less elastic. When the weights given to consumers and firms are not identical, social welfare is not necessarily concave and profits might be negative at the unrestricted optimum. We characterize social welfare optimum with a bound on maximum losses in a class of utility functions. We offer a formula to find the percentage of welfare losses due to oligopoly in this case.

Retrospectives: James Buchanan: Clubs and Alternative Welfare Economics

James Buchanan wrote “An Economic Theory of Clubs” and invented clubs to support a form of welfare economics in which there is no social welfare function (SWF) and individual utility functions cannot be “read” by external observers. Clubs were a means to allow the implementation of individualized prices for public goods and services and to allow each individual to pay exactly the amount he wants to pay. He developed this project to answer and counter Paul Samuelson's analysis of public goods, in which social welfare functions play a crucial role. Buchanan and Samuelson disagreed over the allocation of the costs of the public good to each individual. To Buchanan, it was by relying on individual's preferences. To Samuelson, by using a SWF. Buchanan's clubs are thus foreign and incompatible with the traditional Samuelson-style public economics in which they are used.

Introducing fairness in Norwegian air ambulance base location planning

Background A primary task of the Norwegian helicopter emergency medical services (HEMS) is to provide advanced medical care to the critical ill and injured outside of hospitals. Where HEMS bases are located, directly influences who in the population can be reached within a given response time threshold and who cannot. When studying the locations of bases, the focus is often on efficiency, that is, maximizing the total number of people that can be reached within a given set time. This approach is known to benefit people living in densely populated areas, such as cities, over people living in remote areas. The most efficient solution is thus typically not necessarily a fair one. This study aims to incorporate fairness in finding optimal air ambulance base locations. Methods We solve multiple advanced mathematical optimization models to determine optimal helicopter base locations, with different optimization criteria related to the level of aversion to inequality, including the utilitarian, Bernoulli-Nash and iso-elastic social welfare functions. This is the first study to use the latter social welfare function for HEMS. Results Focusing on efficiency, a utilitarian objective function focuses on covering the larger cities in Norway, leaving parts of Norway largely uncovered. Including fairness by rather using an iso-elastic social welfare function in the optimization avoids leaving whole areas uncovered and in particular increases service levels in the north of Norway. Conclusions Including fairness in determining optimal HEMS base locations has great impact on population coverage, in particular when the number of base locations is not enough to give full coverage of the country. As results differ depending on the mathematical objective, the work shows the importance of not only looking for optimal solutions, but also raising the essential question of ‘optimal with respect to what’.

Equilibria Under Negligence Liability

In many accident contexts, the expected accident harm depends on observable as well as unobservable dimensions of the precaution exercised by the parties involved. The observable dimensions are commonly referred to as the ‘care’ levels and the unobservable aspects as the ‘activity’ levels. In a seminal contribution, Shavell, S (1980). Strict liability versus negligence. J. Leg. Stud. 9: 1–25 extended the scope of the economic analysis of liability rules by providing a model that allows for the care as well as activity level choices. Subsequent works have used and extended Shavell’s model to predict outcomes under various liability rules, and also to compare their efficiency properties. These works make several claims about the existence and efficiency of equilibria under different liability rules, without providing any formal proof. In this paper, we re-examine the prevalent claims in the literature using the standard model itself. Contrary to these prevalent claims, we show that the standard negligence liability rules do not induce equilibrium for all of the accident contexts admissible under the model. Under the standard model, even the ‘no-fault’ rules can fail to induce a Nash equilibrium. In the absence of an equilibrium, it is not plausible to make a claim about the efficiency of a rule per-se or vis-a-vis other rules. We show that even with commonly used utility functions that meet all of the requirements of the standard model, the social welfare function may not have a maximum. In many other situations fully compatible with the standard model, a maximum of the social welfare function is not discoverable by the first order conditions. Under the standard model, even individually optimum choices might not exist. We analyze the underlying problems with the standard model and offer some insights for future research on this subject.

The Social Welfare Function

The social welfare function (‘SWF’) framework is a methodology for assessing governmental policies that originates in theoretical welfare economics and is now widely used in various economic literatures. The framework translates the possible outcomes of policy choice into patterns of well-being among the population of interest, represented by interpersonally comparable well-being numbers. Policies are then ranked in light of some rule for ordering these well-being patterns (such as a utilitarian or prioritarian rule), taking account of the probability that a given policy will lead to a given outcome. This chapter presents the SWF framework, illustrates how it can be used for regulatory policy analysis, and compares the methodology to cost-benefit analysis (‘CBA’), currently the dominant policy-analytic tool in governmental practice. CBA eschews interpersonal comparisons and, instead, translates policy impacts on each person into a monetary equivalent relative to the status quo; these monetary equivalents are then added up. While CBA and the SWF framework are broadly similar in being consequentialist and welfarist, and in adopting a preference view of well-being, they employ distinct analytic structures for integrating information about preferences and possible outcomes to arrive at an assessment of the various policies that government might adopt. As the chapter demonstrates, the structural differences between the SWF framework and CBA can yield significant divergence at the level of policy recommendation.

Constituting an Islamic social welfare function: an exploration through Islamic moral economy

Purpose This study aims to theoretically explore and examine the possibility of developing an Islamic social welfare function (ISWF) within the Islamic moral economy (IME) frame by going beyond the traditional fiqhī approach. It focuses on issues of preference ordering and utility through the normative dimension of Islamic ontology, as expressed and articulated within the IME. Design/methodology/approach Being a theoretical paper, a conceptual and critical discursive approach is used in this paper. Findings To establish an ISWF, a narrow juristic approach remains inadequate; there is a need to integrate the substantive morality to complement the juristic approach to achieve the ihsani process as the ultimate individual objective, which makes an ISWF possible. As the scattered debate on the topic concentrates mainly on the juristic approach, the main contribution of this study is to present a model in which juristic and moralist positions endogenized and augmented to constitute ISWF. Originality/value As there is a limited amount of research available on the subject matter, this paper will be an important theoretical contribution. In addition, this study develops an IME approach rather than fiqh-based approach used in the available research, which makes it novel.