Sophia Cyna

The classic way to count welfare in economics discounts the poor.

Economic welfare is the willingness and ableness to pay for something minus the cost. Maximizing economic welfare is often the goal of economists trying to inform policy but this misses a key point: the poor are less able to pay for goods even when they receive the same utility from consuming the good in question.

Some people are richer than others regardless of their preferences; some people have access to more wealth and higher incomes than others. This means that a naïve estimation of economic welfare will weight the utility received by the rich (or those that have the potential to be rich due to their access to higher incomes) much more than the utility received by the poor.

Economic welfare is convenient to calculate but it doesn’t capture what we actually care about, the real “welfare” of citizens.

What can be done about this? I have no silver bullet solution. However, keeping this pitfall in mind can help economists work out if economic welfare actually is good proxy for what we really care about. We can think about ways to re-weight estimates that take into consideration that some people are less able to pay for goods and services (and perhaps also less able to pay for leisure time) than others. Ad-hoc reweighting might seem messier than simply calculating economic welfare directly, but it may just be better than the alternative of not taking into account the poor’s lower ableness to pay at all.

I would love to hear your thoughts on the topic so please comment or contact me through the contact form on this website!