Welfare economics

Walras enunciated the principle of consumer sovereignty and modeled the way in which it operates to determine the set of commodities that are produced. The entrepreneur transmits the desires of consumers to the production side of the market, thus allocating resources so that the set of commodities produced is in accordance with the structure of consumer demands and hence reflects consumer preferences and purchasing power (1988, §188, pp. 283-4). On the basis of that analysis, Walras developed a thesis that became a central issue in the study of welfare economics, namely that free competition tends to generate a maximum of well-being for society (1988, §221, p. 334; §264, p. 424). The maximum is a relative one, because it depends upon the distribution of income and wealth and the dynamic characteristics of the model that result in it moving toward a particular set of equilibrium values. He emphasized that the maximum results from actions by economic agents to maximize utility, the establishment of a set of prices that equalizes supply and demand, the sovereignty of the consumer, and the other features of a competitive economy that he put into his model. The theory makes clear that "the mechanism of free competition leads precisely to the solution by tatonnement of this system of equations; from which it follows that the mechanism creates maximum satisfaction" (Walras, 1965, vol. 2, letter 928, pp. 364-5; and see Walras, 1988, §264, p. 424).

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