WELFARE ECONOMICS
MSc module ECM205
2004/5
Lecturer
Nancy Devlin
Room
D310
Lectures
Phone
020 7040 8518
e-mail
Office hours
n.j.devlin@city.ac.uk Friday 3 – 5
p.m
Period 2, Friday, 12.30 – 3 p.m
Note: the last lecture (week 10) for this module falls on
Good Friday. We may either schedule this lecture for the
following Friday (week 11), or hold this lecture on the
Wednesday of Week 10. Let me know your preferences.
Lecture slides, notes and other course materials used in class
will be available from www.staff.city.ac.uk/n.j.devlin
Aims
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.
1
READING
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]
These books 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)
2
ASSESSMENT
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 summer 2005, worth 80% of
your final mark.
Coursework
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
1. 21st January
2. 28th January
3. 4th February
4. 11th February
TOPIC
Introduction to welfare
economics
KEY READING
[J]: Chapter 1 ‘Introduction’
Utility maximisation; utility
functions; budget constraints;
income and substitution effects;
demand functions.
[J]: Appendices A1, A2 & A3
The pareto principle and pareto
optimality
The first fundamental theorem of
welfare economics
5. 18th February
Social Welfare functions
6. 25th February
Arrow’s Impossibility Theorem
3
[B&B]: Chapter 1 ‘The study
of welfare economics’.
For additional coverage,
consult the relevant chapters
from the introductory
microeconomics textbooks
referred to under ‘reading’.
t.b.a.
[J]: Chapter 2 ‘Pareto
optimality in a market
economy’.
[B&B]: Chapter 3 ‘welfare in a
many-household economy: the
pareto criterion’.
[J]: Chapter 3 ‘The
compensation principle and the
social welfare function’.
[J]: pp. 31 & 39.
[B&B]: ‘Social welfare
orderings: requirements and
possibilities’.
WEEK-BY-WEEK GUIDE TO MODULE TOPICS
(continued)
SESSION/DATE
7. 4th March

TOPIC
Market failure

The theory of second best
KEY READING
[J]: Chapter 5 ‘Market failure:
causes and welfare
consequences’.
[B&B]: Chapter 4 ‘Market
failure and the theory of second
best’.
8. 11th March
9. 18th March
10. Date to be
confirmed
[Friday 26th March
is Good Friday]
Public choice and government
intervention; government failure.
[J]: Chapter 6 ‘Public choice’
Cost benefit analysis: the
compensation principle;
measuring welfare changes;
decision rules
[J]: Chapters 8 – 10.
‘Extra welfarism’: cost
effectiveness and cost utility
analysis.
Final exam, summer 2005
4
& Chapter 7.
[B&B]: Chapters 7, 9 & 10.