David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Learning Outcomes
By the end of this chapter, you should understand:
0 what we mean by welfare economics
f) horizontal and vertical equity
0 the concept of Pareto efficiency
G how the 'invisible hand' may achieve efficiency
0 the concept of market failure
0 why partial removal of distortions may be harmful
0 the problem of externalities and possible solutions
0 how monopoly power causes market failure
e distortions from pollution and congestion
Ci) why missing markets create distortions
(9 the economics of climate change
Normative or welfare economics is concerned with making value judgements and using these to recommend
which policies are desirable. Much of economics is about reconciling the goals of efficiency and fairness.
In this chapter we define efficiency and equity (fairness), and examine reasons for market failure.
Chapter 1 noted that markets are not the only way society can resolve what, how and for whom to produce.
Communist economies relied heavily on central direction or command. Are markets a good way to allocate
scarce resources? What is a 'good' way? Is it fair that some people earn much more than others in a market
economy? These are not positive issues about how the economy works but normative issues about how
well it works. They are normative because the assessment depends on the value judgements adopted by
the assessor.
Left- and right-wing parties disagree about how well a market economy works. The right believes the
market fosters choice, incentives and efficiency. The left emphasizes the market's failings and the need for
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