Welfare economics – definition and meaning

Welfare economics is a branch of economics that focuses not only on efficiency, but also improving human welfare and social conditions. Often known as economics with a heart, it is done principally through the optimum distribution of wealth – the best allocation of resources.

The term should not be confused with ‘the economics of welfare’, which is all about government welfare programs, i.e. financial aid given to vulnerable individuals by the government.

Welfare economics looks at how different types of economic activity and various ways of allocating scarce resources impact the well-being of specific countries, regions, and people.

Put simply, welfare economics is a subfield of economics that focuses on how resources are allocated to maximize human welfare.


Welfare economics looks at how resources are allocated, and how those allocations affect social welfare.


Economics focuses on questions about efficiency. Its welfare subfield does too, but it also concentrates on questions about equity.

According to BusinessDictionary.com, welfare economics is:

“Cost-benefit analysis of the allocation of resources, economic activity, and distribution of the resulting output on a society’s welfare.”

While welfare economics uses the techniques and perspective of **microeconomics, the data gathered and analyzed can be used to make conclusions on a **macroeconomic scale.

** Microeconomics is the study of economics at a group, company or individual level, while macroeconomics studies the national economy as a whole.

According to some economists, the state of overall social good might be enhanced through the redistribution of incomes within a nation’s economy. Income redistribution, also known as the redistribution of wealth, may be achieved through taxation, public services, land reform, monetary policies, confiscation, or charity.

Amartya Sen welfare economics - Nobel PrizeAmartya Kumar Sen is an Indian economist and philosopher. Since 1972, he has taught and worked in the UK and USA. He is today the Thomas W. Lamont University Professor at Harvard University and member of the faculty at Harvard Law School. When he was awarded the Nobel Prize for Economics, he was working at Trinity College, Cambridge, UK. (Image: guim.co.uk. Quote in image: nobelprize.org/nobel_prizes)

Welfare economics and policymakers

When determining which economic, fiscal, and monetary policies to pursue, politicians and other policymakers use issues regarding welfare economics as a guide.

For supporters of welfare economics, public policy will generally include a target for a minimum quality of life expectation, which may be achieved through a national minimum wage, affordable housing, access to education, healthcare, and other required services.

Followers of pure capitalism – a **free-market economy – argue that welfare economics reduces individual choice and ultimately does not make society richer.

** A free market, also known as an ‘open- market’, is an economy where the buying and selling of products and services are not under the control of government. Businesses and individuals can trade freely – there is no government interference.

Video – Welfare Economics

In this Mises Media video, Jeffrey M. Herbener, who teaches economics at Grove City College, Pennsylvania, USA, and is a senior fellow at the Ludwig von Mises Institute in Auburn, Alabama, USA, explains what welfare economics is.

He poses the question: “Can we as economists construct a scientific analysis of social well-being? So, is there an economic theory of the well-being of people in society?”