WELFARE ECONOMICS:MEANING,PARETO’S OPTIMALITY,RENT AND RICARDIAN THEORY OF RENT,QUASI RENT

1. WELFARE ECONOMICS:MEANING,PARETO’S
OPTIMALITY,
RENT AND RICARDIAN THEORY OF
RENT,QUASI RENT

2. WELFARE ECONOMICS
A branch of economics that focuses on
the optimal allocation of resources and goods and
how this affects social welfare.
Welfare economics analyzes the total
good or welfare that is achieved at a current state
as well as how it is distributed.
Welfare economics is a subjective study
that may assign units of welfare or utility in order
to create models that measure the improvements
to individuals based on their personal scales.

3. Prof. Baumol states that, “Welfare Economics has
concerned itself mostly with policy issues which arise out of
the allocation of resources, with the distribution of inputs
among the various commodities and the distribution of
commodities among various consumers.”
And it may be emphasised again that allocation
of resources is efficient or optimum when social welfare is
maximum.
Economists use a criterion known as Pareto-
optimality criterion for evaluating whether social welfare
increases or decreases as a result of a specific change in
economic state.

4. PARETO’S OPTIMALITY
Pareto efficiency, or Pareto optimality, is a state of
allocation of resources in which it is impossible to make any
one individual better off without making at least one
individual worse off.
The term is named after Vilfredo Pareto (1848–1923), an
Italian economist who used the concept in his studies
of economic efficiency and income distribution. The concept
has applications in the life sciences.

5. An economy is in a Pareto Optimal state when no
further changes in the economy can make one person better
off without at the same time making another worse off.
Eg: When there are two individuals, one with a loaf of
bread and the other with a block of cheese, both can be
made better off by exchanging the bread for cheese.
A Weak Pareto efficiency is the result of a change
that makes at least one party better off, and does not make
any party worse off.
A strong Pareto efficiency is the result of a change
in allocation in which all dimensions gain.

6. In curve below a move from B to C, A to B, A to D, causes a weak
Pareto efficiency. In curve below a move from A to C, or from A
to any point on CD causes a strong Pareto efficiency. In the curve
below, for A, BC is Weak Pareto Optimal and CD is strong Pareto
optimal.

8. PARETO IMPROVEMENT
A Pareto improvement is said to have taken place
if a change is made in the distribution of goods or resources
that results in at least one individual being better off than
before the change while not making any other individual
worse.
Pareto optimality is to described as any state
where no Pareto improvement is possible. This effectively
means that it is impossible to improve the condition of any
single individual without harming the condition of another
individual.

9. RENT
Rent is the amount paid for the use of land.
Rent is the payment for the use of only land and is
different from contractual rent which includes the returns on
capital investment made by the landlord in form of wells,
irrigation structures, etc., besides the payment for the use of
land.
Two important theories of rent are
# Ricardian theory of rent
# Modern theory of rent

10. RICARDIAN THEORY OF RENT
According to Ricardo, “Rent is the portion of the
produce of the earth which is paid to the landlord for the use
of original and indestructible powers of the soil”.
Ricardo believed that rent takes place on account
of differences in the fertility of land. Rent might too arise on
account of situational benefit even when all lands are
uniformly fertile.
Ricardian rent is also known as pure rent.

11. It is mainly based on two assumptions:
# Land differs in fertility.
# The most fertile lands are limited in supply.
The three important aspects of the Ricardian Theory of Rent are:
 The Indestructible powers of Soil means that the
Properties of Land cannot be changed by human beings like the
fertility of Land, the nature of the soil. Here he stresses even the
bombs cannot destroy the powers of the land.
His theory of rent is based on the Law of diminishing
Returns.
His theory is based on the increase in the
population.
`

12. Eg:
Ricardo described his theory by taking the illustration of
colonization. When some people go and settle down in a place, at first
they will cultivate the best lands. When more people go and settle
down, the demand for land will raise and they will cultivate the
second-grade lands. The cost of production will go up. Therefore the
price of grain in the market should cover the cost of cultivation. In this
situation, the first grade land will obtain rent.
After some time, when there is raise in population, even third
grade lands will be cultivated. Now, even second grade lands will
obtain rent and first grade lands will obtain more rent however the
third grade land will not obtain rent. It is termed as no-rent land or
marginal land.

14. According to Ricardo, rent is price determined,
i.e., it is determined by price of the grains generated in the land.
He also believed that rent is high since price is high and not the
other way round. Ricardo came to the conclusion that rent did
not enter price since there are certain no-rent or marginal lands.
Since the produce of no-rent land obtains a price, Ricardo argued
that rent did not enter price.
In figure above, grades of land are shown all along
the X axis and the yield up the y–axis. The shaded region in the
diagram points out rent. In this condition, grade I and grade II
lands get rent. The grade III land will not obtain rent.

15. QUASI RENT
Quasi rent is the earning of capital equipments such as
machineries, buildings, etc., which are inelastic in supply, in short
run.
According to Marshall,the quasi rent is only a temporary
surplus ,which is enjoyed by the owner of the capital equipments
in the short run. This is due to the increase in its demand and it
will disappear in long run, if supply of the capital equipment is
increased I response to the increased demand.
Quasi rent = Total revenue earned – Total variable costs

16. DIFFERENCE BETWEEN RENT AND QUASI
RENT
# Rent is a payment for natural gifts like land. Quasi rent
is a payment for man made appliances like machines.
# As the supply of land cannot be changed, rent persists
in both short run and long run. But quasi rent is a short run
phenomenon which disappears in the long run.
# Rent is permanent in nature while quasi rent is a
temporary phenomenon.
# Rent cannot be zero but quasi rent can be zero when
the short run price of the commodity equals its average variable
cost.

17. THANK YOU…