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Economics of the welfare state

Nicholas Barr - the economics of the welfare state

Chapter 1

The definition
The welfare state doesn't have a clear definition of it. It can mean different things in different
countries. The idea started after the IIWW, and after that we are re writing e history of the WS, so
we must go earlier in time to get a first definition.
Today it is very different. The features change from country to country.
There is no simple definition. The welfare state is a mosaic. It is very difficult to give a precise
definition because it comes from very different origins. It comes from the labour market, private
provisions, voluntary welfare, the state:cash benefits and benefits in kind.
In the past definition of welfare state was very attached to the labour market, such as in the golden
age, thinking it in terms of given wage and redistribution income.
Private provision of welfare : voluntary private insurance and individual saving.
Instead voluntary welfare is time that people give for free and voluntary charitable donations.
And at last we have the state, that give two different benefits: cash or benefits impact.
The welfare is something you have to think about with all these features. Southern european
countries 30 years ago had a welfare society: state was week so the society provided voluntary
There are many different ways of delivering : finance vs. Production. Example: private school that
uses public finance.
The boundaries are not well defined within the boarders of every country.
Even if no definitions, what could help us are three principal elements defined by Asa Briggs:
- a guarantee of minimum standards including a minimum income.
- Social protection in the event of insecurity (insurance).
- The provision of services at the best level possible.
The types of cash benefits (two types of benefits)
-Social insurance awarded on the base of previous contribution and the occurrence of a specific
event such as unemployment or specified age)
-non contributory benefits awarded on the basis of a specified contingency such as universal
benefits ex: child benefits or social assistance awarded on a basis of an income test.
Typical elements of the welfare are then:
Cash benefits
-sickness or disabilities
-old age pensions
-family allowances (child benefit)
-income-tested benefit
Benefits in kind
-health car and education.
The approach
-Two questions: what are the aims of policy?
This is normative and largely ideological
-And by what methods are those aims best achieved?
This question is mainly a technical issue about which method or range of methods work best (it
raises a positive issue)

There are Positive vs normative kind of questions. (Ideological and not)

The positive-normative distinction
Positive analysis : is explained or predict phenomena. We can at least in principle state whether a
proposition is true or false.
The normative analysis: evaluates a situation or a policy measure. It is often intended at
prescription. We cannot say, even in principle whether a normative proposition is true or false.
Normative analysis is always dependent upon the criterion we use.
Normative issues: (facts)
-should students pay fees for their education?
-health care service should it be freely available or people pay according to their income?
-should public utilities be privatized?
-Is the government too big?
Positive issues (opinion, but anyway technical)
-what is the effect of education on economic growth and social inclusion?
-who bears the burden of an increase in the VAT? How will economic agents react to that
These positive questions i can give an answer which is true or false. It is not an opinion.


Chapter 1.2

1 what are the aims of policy? --> normative question

2 by what methods are those aims best achieved? --> technical question
This course deals with more normative issues than positive issues.
Positive and normative don't have controversial definition. Positive issues are propositions on
matters of fact, normative issues are propositions on what is ethically preferable.
The big distinction that Samuel weston (lettura 1) introduces is ethical. So normative are
propositions about ethical issues.
Positive analysis is intended to explain or predict phenomena. We can at least state whether is true
or false.
Normative analysis deals with the evaluation of a situation or a policy measure. The analysis
depends on the criterion we use.
The level of co-participation of the users of the national health system in the health cost service is
Survival income pensions are undesirable schemes;
(I have to find the criterion, good criterion to say if a statement is acceptable or not).
Public investment in education enhances economic growth;
Housing price controls change the behavior of economic agents, producing unbalanced in the
housing market, --> thus they should be avoided. (This part is normative, which makes all the
proposition normative)
Normative issues ask for a criterion on which people can actually discuss. It is not just an opinion.
It is based on positive propositions, that can be discuss because can be true or false.


Positive analysis is not just facts, it is not science.

In general statistics doesn't count all the people that are employed but only the ones that were
actively looking for a job, or doesn't count in the workforce all the ladies that are at home
(housewives). So the unemployment rate isn't completely right.
Our terminology isn't value free, they deal with facts but they have a value load involvement.
What is the purpose?
To keep the issues distinct. So we could actually discuss on the criterion and not on the thought of
every person.
Normative criteria
we use in studying economics of the welfare state.
The basic criteria: efficiency, equity (social justice) freedom, and sustainability


Normative criteria efficiency

A situation is said to be economically efficient if:
-no one can be made better off without making someone else worse off (Pareto efficiency)
-no additional output can be obtained without increasing the amount of inputs
-production proceeds at the lowest possible per unit cost
These principles are very demanding and strict. In fact we cannot improve the situation of some
one without hurting somebody else.
Kaldor-hicks efficiency
Is a measure of economic efficiency that is less stringent than Pareto's. An outcome is considered
efficient if a Pareto optimal outcome can be reached by arranging sufficient compensation from
those that are made better off to those that are made worse off so that all would end up no worse
off than before.
Normative criteria equity
-social justice
Social welfare functions snd social indifference curves.
-the definition of social welfare depends upon the concepts one adopts. It is a question of moral
philosophy. (utilitarianism, John Rawls, Amartya Sen)
Normative criteria (negative) freedom
The individual should retain some autonomy regarding government intervention (libertarianism)
->private life should be preserved from public intervention.
-freedom vs paternalism
--merit goods (seat belts, elementary education, vaccination, earthquake insurance, saving for
-positive freedom
The capability to achieve outcomes that people value and have the reason to value.

Chapter 1.3

Objectives of the welfare state

The two main goals are:
-efficiency and equity:
--efficiency (macro, micro incentives)
--supporting living standards (Insurance, consumption smoothing, poverty relief)
--the reduction of inequality (vertical equity, horizontal equity)
--social inclusion (dignity, social solidarity)
--administrative feasibility (people must understand the policy and not promote abuse)
(intelligibility, absence of abuse)
At any particular time the efficient fraction of cross domestic production should be devoted to the
totality of the ws institutions avoiding cost explosions , being compatible with growth objectives
policy should ensure the efficient division of total ws resources between the different cash benefits,
different types of medical treatment and different kinds of educational activity
Consumption smoothing and risk sharing contribute to micro efficiency.
-allocative efficiency
The allocation of scarce resources in such a way that no reallocation can make any individual
better off without making at least one other individual worse off (Pareto efficiency o external
-productive efficiency
The allocation of resources so as to produce the maximum output from given inputs (internal
Framing objectives for the welfare state
It is useful to focus on a subset of these objectives.
-major objectives of individuals
-governments have additional
A mix of:
- general government revenues (taxation)
- Dedicated revenues (social insurance contributions)
- User charges (fees for attending something)
The relative weights vary by country and over time

Chapter 1.5

1) what is the welfare state

2) What are the main purpose of the welfare state
A welfare state is a concept of government in which the state which protects and promote the
economic and social wealth. It is based on equality of opportunity, balanced distribution of wealth,
and there is a public responsibility for those unable to achieve the minimal provisions for a good


Why is it so interesting and relevant to study and discuss the welfare state today.
Because the ws have lots of controversies in the wf, difficult to give a meaning and desirability, in
Europe it is in fact stronger than in Canada o USA.
We have anyways an enormous discussion in Europe about the sustainability of the ws.
The challenges are then:
-demographic change
-changes in the family structure
-changes in the structure of jobs (unstable labour market)
-rising expenditure on the ws
-economic crisis of 2008
-changes in the political/ideological environment



Sources of welfare:
-Labour market
-Private provision of welfare (insurance)
-Voluntary work
Not only the government
The welfare state in historical perspective (asa briggs)
For Asa Briggs the ws is a state in which organized power il deliberately used (thru politics and
administration) to modify the play of market forces in 3 directions:
1) Minimum income
2) Enabling contingencies (sickness, old age, unemployment)
3) Best Standards for everyone.
The first two are social service state , the third introduces the idea of optimum and not minimum
Historical consideration:
A) market forces (self regulating markets)
B) Social contingencies (industrialism)
C) Organized power (state intervene)


Chapter 2

Political theory: social justice and the state

Theory of society
A) For Peter Bauer the ws is a moral issue and it is like treating adult as children (1983)
B) For Milton Friedman negative way of looking at the ws limiting the freedom, ecc (1980)
C) Commission on social justice , London 1993:
- free society is the equal worth of all citizen
- Every citizenship has to be able to meet their basic needs
- Right to self respect and personal autonomy demands the widest possible spread of
- Not all inequalities are unjust but inequalities should be reduced
D) for esping-andersen the social citizenship constitutes the core idea of a ws. But it is not only
rights but also the family's role in social provision.
Theories of society
A society is a co-operative venture for the advantage of the members.
It generally contains both identity of interest and conflicts of interests between individuals and
The institutions of any society influence a person life's changes
The purpose of a theory of society is to offer principles which enable us to choose between
different social arrangements.
Libertarian views
Libertarian aim: maximize liberty
-Natural rights libertarians argue that state intervention is morally wrong except rare circumstances
-Empirical libertarians argue that state intervention will reduce welfare; Hayek thinks that the
pursuit of social justice will destroy market order (nothing to do with moral). He believes that the
intervention of the state in the economy damages the economy.
The utilitarianism aim: policy should seek to maximize the total utility of members of society.
So a utilitarian looks like an egalitarian, but it deepens on the curves of marginal utility for each
individual. The only concerning is e global view.
(Page 26 graph).