Relative utility of different individuals

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Under the lens of Pareto efficiency, optimal welfare, or utility, is achieved when the market is allowed to reach an equilibrium price for a given good or service-it's at this point that consumer and producer surpluses are maximized.

However, the aim of most modern welfare economists is to apply notions of justice, rights, and equality to the machinations of the market. In that sense, markets that are "efficient" do not necessarily achieve the greatest social good.

One reason for that disconnect: the relative utility of different individuals and producers when assessing an optimal outcome. Welfare economists could theoretically argue, for example, in favor of a higher minimum wage-even if doing so reduces producer surplus-if they believe the economic loss to employers would be felt less acutely than the increased utility experienced by low-wage workers.

Practitioners of normative economics, which is based on value judgments, may also try to measure the desirability of "public goods" that consumers don't pay for on the open market.

Reference no: EM133186789

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