Welfare economics is the study of economic efficiency, focusing on how to maximise social wellbeing through optimal resource allocation. This branch of economics provides the theoretical foundation for evaluating the overall welfare impacts of economic activities, policies, and decisions. It examines how economic systems can best serve society by maximising the total wellbeing of all economic agents.
At its core, welfare economics addresses fundamental questions about how scarce resources should be allocated to achieve the greatest benefit for society. This involves analysing trade-offs between efficiency and equity, understanding market failures, and identifying conditions under which markets achieve socially optimal outcomes. The field employs tools such as cost-benefit analysis, willingness-to-pay methods, and social welfare functions to compare alternative states of the economy and guide policy decisions.
When welfare economics is applied with a specific ethical framework, its objectives align closely with broader sustainability goals. When social wellbeing is sought to be maximised among equal and autonomous agents both within the current generation and across future generations, the goal of welfare economics becomes identical to the goal of Sustainable development. This intergenerational perspective ensures that present economic activities do not compromise the ability of future generations to meet their own needs, as defined in the Brundtland Commission's classic formulation of sustainable development.
In the context of Life Cycle Assessment, welfare economics provides the conceptual basis for monetary valuation of environmental and social impacts. By converting externalities into monetary units, practitioners can compare the full social costs and benefits of different product systems, supporting more informed decision-making that accounts for both market and non-market contributions to human wellbeing.
