Utility and the theory of welfare

Abstract

Standard welfare economics, restricted to ordinal preference maps and the Pareto criterion, fails to provide a sufficient basis for selecting welfare-enhancing policies. Under these limited assumptions, the probability of a chosen policy outperforming a random selection of alternatives is negligible. The common axiom that indifference implies identical welfare levels is logically untenable given the non-transitivity of the indifference relation; an individual may be indifferent between successive pairs in a series while maintaining a clear preference between the first and last elements. A viable welfare theory must instead assume that individual welfare is determinate and that perceptible preferences correspond to greater variations in group welfare than do indifferences. By treating “marginal preference”—the smallest perceptible welfare difference—as a standard unit, the theory enables the interpersonal comparisons necessary for a determinate group welfare function. This approach demonstrates that while welfare shifts within the bounds of indifference are trivial, significant individual preferences create measurable changes in aggregate welfare. Ultimately, evaluating national income and group policy requires this quantitative framework, as methods relying solely on price-quantity data or potential compensation criteria remain fundamentally indeterminate or internally inconsistent. – AI-generated abstract.