Essays in Honour of Horst Hanusch
Edited by Andreas Pyka, Uwe Cantner, Alfred Greiner and Thomas Kuhn
Chapter 10: Paretian Welfare Theory and European Competition Policy
Arnold Heertje 1. INTRODUCTION Paretian welfare theory relates the subjective and formal character of welfare, which consumers derive from the satisfaction of wants, to the allocation of scarce resources. In fact, it is a theory of allocation that describes a technically feasible allocation, with the property that each consumer maximizes his utility, given the level of utility of all the other consumers. As Paretian welfare theory considers the welfare of the citizens exclusively from the point of view of their individual preferences as consumers, a Pareto optimum also implies optimal social welfare. With another distribution of income, we face another Pareto optimal allocation. Pareto optimality is defined independently of the distribution of income and of the institutional structure of the mechanism of allocation. This insight confirms Hennipman’s view that Pareto optimality is an ‘analytical tool’ and does not imply a value judgement (Hennipman, 1995, p. 59). A Banach space is an abstract, rich, robust and, above all, simple mathematical structure to represent an economy with consumers, producers, means of production and consumer goods. The number of goods may be infinite. Consumer goods are depicted as bundles of characteristics upon which utility functions are defined. Important characteristics are location and time of the availability of goods. Utility functions differ from consumer to consumer, profit functions from producer to producer. Besides present generations of consumers and producers, future generations may be distinguished. The welfare of future generations of consumers may be brought within the scope of Paretian welfare theory through the hypothesis...
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