Welfare Economics

MSc module SS4.025


Lecturer / Room / Phone / e-mail / Office hours
Nancy Devlin / A557 / 020 7040 8518 / / Tues 2-5 p.m

Lectures Term 2, Friday, 9.30 a.m – 12 noon.

Lecture slides, notes and other course materials used in class will be available from www.staff.city.ac.uk/n.j.devlin


The aim of this module is to introduce you to the subject of welfare economics. Welfare economics concerns the means by which the desirability of different policy options can be judged, and provides the theoretical foundations for the economic evaluation techniques to which you have been introduced in the Economic Evaluation module.

Learning outcomes

On successfully completing this module, you will be able to:

1.  Explain the principles and applications of welfare economics to the health care sector.

2.  Understand the formulation of criteria for judging and ranking the desirability of different policy options in the allocation of scarce health resources.


The textbook for this module is:

[J] Johansson, P-O. (1991) An introduction to modern welfare economics. Cambridge University Press. [ library shelfmark: 330.155 JOH]

Other texts which will be referred to often are:

[B & B] Boadway, R., Bruce, N. (1984) Welfare economics. Oxford: Blackwell. [library: 330.155 BOA]

[C] Culyer, A.J. (1980) The political economy of social policy. Oxford: Martin Robertson. [library shelfmark: 361.61 CUL]

[S] Stiglitz, J.E. (1988) Economics of the public sector. New York: W.Norton. [library: 336 STI]

Unfortunately, each one of these books are out of print - but they are available in the library on short term loan

A handout for each week will provide recommended further reading for each topic.

Economic theory

This module builds on and extends the elements of microeconomic theory introduced in the Economics of Health Care and Economic Evaluation modules. You may find it useful to reinforce and revise your understanding of micro theory by consulting an introductory microeconomics textbook. We recommend:

Begg, D., Fischer, S, Dornbusch, R. (2003) Economics. 7th edition. London: McGraw Hill. (library shelf-mark: 330 BEG)

Parkin, M., Powell, M., Matthews, K. (2000) Economics. Harlow: Addison Wesley

(library shelf-mark: 330 PAR)


This module is assessed by one piece of coursework, worth 20% of your final mark on this module, and by a three-hour final examination in January, worth 80% of your final mark.


One assignment; details of the topic and deadline to be discussed with the class.

Week-by-week guide to module topics

The following table shows the schedule of topics, assessment and key readings for this module. You should attempt the key readings before coming to the sessions. A separate handout for each session will provide details of recommended further readings and suggested study and revision questions.

Session/date / Topic / Key reading
1. 30th January / Introduction to welfare economics / [J]: Chapter 1 ‘Introduction’
[B&B]: Chapter 1 ‘The study of welfare economics’.
2. 6th February / Utility maximisation; utility functions; budget constraints; income and substitution effects; demand functions. / [J]: Appendices A1, A2 & A3
For additional coverage, consult the relevant chapters from the introductory microeconomics textbooks referred to under ‘reading’.
3. 13th February / The pareto principle and pareto optimality / t.b.a.
4. 20th February / The first fundamental theorem of welfare economics / [J]: Chapter 2 ‘Pareto optimality in a market economy’.
[B&B]: Chapter 3 ‘welfare in a many-household economy: the pareto criterion’.
5. 27th February / Social Welfare functions / [J]: Chapter 3 ‘The compensation principle and the social welfare function’.
6. 6th March / Arrow’s Impossibility Theorem / [J]: pp. 31 & 39.
[B&B]: ‘Social welfare orderings: requirements and possibilities’.

Week-by-week guide to module topics (continued)

Session/date /



Key reading

7. 13th March / ·  Market failure
·  The theory of second best / [J]: Chapter 5 ‘Market failure: causes and welfare consequences’.
[B&B]: Chapter 4 ‘Market failure and the theory of second best’.
8. 20th March / Public choice and government intervention; government failure. / [J]: Chapter 6 ‘Public choice’
& Chapter 7.
9. 27th March / Cost benefit analysis: the compensation principle; measuring welfare changes; decision rules / [J]: Chapters 8 – 10.
[B&B]: Chapters 7, 9 & 10.
10. 3rd April / ‘Extra welfarism’: cost effectiveness and cost utility analysis.
Final exam