In
welfare economics
Welfare economics is a field of economics that applies microeconomic techniques to evaluate the overall well-being (welfare) of a society.
The principles of welfare economics are often used to inform public economics, which focuses on the ...
, a social planner is a hypothetical decision-maker who attempts to maximize some notion of
social welfare
Welfare spending is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifically to social insurance p ...
. The planner is a fictional entity who chooses allocations for every agent in the economy—for example, levels of consumption and leisure—that maximize a
social welfare function
In welfare economics and social choice theory, a social welfare function—also called a social ordering, ranking, utility, or choice function—is a function that ranks a set of social states by their desirability. Each person's preferences ...
subject to certain constraints (e.g., a physical resource constraint, or
incentive compatibility
In game theory and economics, a mechanism is called incentive-compatible (IC) if every participant can achieve their own best outcome by reporting their true preferences. For example, there is incentive compatibility if high-risk clients are bette ...
constraints). This so-called planner's problem is a mathematical
constrained optimization
In mathematical optimization, constrained optimization (in some contexts called constraint optimization) is the process of optimizing an objective function with respect to some variables in the presence of constraints on those variables. The obj ...
problem. Solving the planner's problem for all possible Pareto weights (i.e., weights on each type of agent in the economy) yields all
Pareto efficient allocations.
Connection with the fundamental welfare theorems
Any Pareto efficient allocation is a solution to a planner's problem. However, the planner is a purely fictional entity; solving the planner's problem requires knowledge of consumers' preferences and all physical resource constraints in the economy. Thus, a natural question is whether a decentralized market could implement a Pareto efficient allocation, or conversely, whether the outcomes from a decentralized market are Pareto efficient. The
fundamental theorems of welfare economics answer these questions, under certain key assumptions.
states that, under certain conditions (for example, if there are no
externalities
In economics, an externality is an indirect cost (external cost) or indirect benefit (external benefit) to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced ...
), if an allocation and a set of prices constitute a
competitive equilibrium
Competitive equilibrium (also called: Walrasian equilibrium) is a concept of economic equilibrium, introduced by Kenneth Arrow and Gérard Debreu in 1951, appropriate for the analysis of commodity markets with flexible prices and many traders, and ...
, then the allocation is
Pareto efficient.
The second welfare theorem states that, under certain conditions, any Pareto efficient allocation can be decentralized as a competitive equilibrium.
See also
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Pareto efficiency
In welfare economics, a Pareto improvement formalizes the idea of an outcome being "better in every possible way". A change is called a Pareto improvement if it leaves at least one person in society better off without leaving anyone else worse ...
*
Social welfare function
In welfare economics and social choice theory, a social welfare function—also called a social ordering, ranking, utility, or choice function—is a function that ranks a set of social states by their desirability. Each person's preferences ...
*
Welfare economics
Welfare economics is a field of economics that applies microeconomic techniques to evaluate the overall well-being (welfare) of a society.
The principles of welfare economics are often used to inform public economics, which focuses on the ...
*
Constrained optimization
In mathematical optimization, constrained optimization (in some contexts called constraint optimization) is the process of optimizing an objective function with respect to some variables in the presence of constraints on those variables. The obj ...
*
Production-possibility frontier
References
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{{DEFAULTSORT:Social Planner
Welfare economics