ARTHUR CECIL PIGOU, THE ECONOMICS OF WELFARE (1920)

1 11/02/2005 02:33 PMPigou_0316 Page 1 of 551 ONLINE LIBRARY OF LIBERTY Liberty Fund, Inc. 2005 CECIL pigou , THE ECONOMICS OF WELFARE (1920)URL of this E-Book: of original HTML file: ABOUT THE AUTHORP igou is best known for his work on welfareeconomics. He developed the concept ofexternalities from Marshall and used it tojustify government intervention. ABOUT THE BOOKP igou develops the concept of externalities atsome length and uses their existence as ajustification for government intervention. THE EDITION USEDThe ECONOMICS of WELFARE (4th ed.) (London:Macmillan, 1932). COPYRIGHT INFORMATIONThis book is published online with thepermission of the copyright holder TransactionPublishers. Please direct all requests forpermissions and copyrights to TransactionPublishers, from whom hard copies of thebooks are also available.

2 FAIR USE STATEMENTThis material is put online to further theeducational goals of Liberty Fund, Inc. Unlessotherwise stated in the Copyright Informationsection above, this material may be usedfreely for educational and academic may not be used in any way for profit. 11/02/2005 02:33 PMPigou_0316 Page 2 of 551 OF CONTENTSPART I WELFARE AND THE NATIONAL DIVIDENDCHAPTER I WELFARE AND ECONOMIC WELFAREFOOTNOTESCHAPTER II DESIRES AND SATISFACTIONSFOOTNOTESCHAPTER III THE NATIONAL DIVIDENDFOOTNOTESCHAPTER IV WHAT IS MEANT BY MAINTAINING CAPITAL INTACTFOOTNOTESCHAPTER V CHANGES IN THE SIZE OF THE NATIONAL DIVIDENDFOOTNOTESCHAPTER VI THE MEASUREMENT OF CHANGES IN THE SIZE OF THE NATIONAL DIVIDENDFOOTNOTESCHAPTER VII ECONOMIC WELFARE AND CHANGES IN THE SIZE OF THE NATIONAL DIVIDENDFOOTNOTESCHAPTER VIII ECONOMIC WELFARE AND CHANGES IN THE DISTRIBUTION OF THE NATIONALDIVIDENDFOOTNOTESCHAPTER IX REACTIONS THROUGH THE NUMBERS OF THE POPULATIONFOOTNOTESCHAPTER X THE NATIONAL DIVIDEND AND THE

3 QUALITY OF THE PEOPLEFOOTNOTESCHAPTER XI THE METHOD OF DISCUSSION TO BE FOLLOWEDPART II THE SIZE OF THE NATIONAL DIVIDEND AND THE DISTRIBUTION OF RESOURCES AMONGDIFFERENT USESCHAPTER I INTRODUCTORYFOOTNOTESCHAPTER II THE DEFINITION OF MARGINAL SOCIAL AND PRIVATE NET PRODUCTSFOOTNOTESCHAPTER III THE VALUES OF MARGINAL SOCIAL NET PRODUCTS AND THE SIZE OF THENATIONAL DIVIDENDFOOTNOTESCHAPTER IV RATES OF RETURN AND THE VALUES OF MARGINAL PRIVATE NET PRODUCTSFOOTNOTESCHAPTER V THE EFFECTS OF ELIMINATING OBSTACLES TO MOVEMENTFOOTNOTES11/02/2005 02:33 PMPigou_0316 Page 3 of 551 VI hindrances TO EQUALITY OF RETURNS DUE TO IMPERFECT KNOWLEDGEFOOTNOTESCHAPTER VII hindrances TO EQUALITY OF RETURNS DUE TO IMPERFECT DIVISIBILITY OFTHE UNITS IN TERMS OF WHICH TRANSACTIONS ARE CONDUCTEDFOOTNOTESCHAPTER VIII hindrances TO EQUALITY OF RETURNS DUE TO RELATIVE VARIATIONS OFDEMAND IN DIFFERENT OCCUPATIONS AND PLACESFOOTNOTESCHAPTER IX DIVERGENCES BETWEEN MARGINAL SOCIAL NET PRODUCT AND MARGINALPRIVATE NET PRODUCTFOOTNOTESCHAPTER X MARGINAL PRIVATE AND SOCIAL NET PRODUCTS IN RELATION TO INDUSTRIALFORMSFOOTNOTESCHAPTER XI INCREASING AND DECREASING SUPPLY PRICEFOOTNOTESCHAPTER XII STATE REGULATION OF COMPETITIVE PRICESFOOTNOTESCHAPTER XIII STATE REGULATION OF

4 SUPPLIESFOOTNOTESCHAPTER XIV THE CONDITIONS OF MONOPOLISATIONFOOTNOTESCHAPTER XV MONOPOLISTIC COMPETITIONFOOTNOTESCHAPTER XVI SIMPLE MONOPOLYFOOTNOTESCHAPTER XVII DISCRIMINATING MONOPOLYFOOTNOTESCHAPTER XVIII THE SPECIAL PROBLEM OF RAILWAY RATESFOOTNOTESCHAPTER XIX PURCHASERS' ASSOCIATIONSFOOTNOTESCHAPTER XX INTERVENTION BY PUBLIC AUTHORITIESCHAPTER XXI PUBLIC CONTROL OF MONOPOLYFOOTNOTESCHAPTER XXII PUBLIC OPERATION OF INDUSTRIESFOOTNOTESPART III THE NATIONAL DIVIDEND AND LABOURCHAPTER I INDUSTRIAL PEACEFOOTNOTESCHAPTER II THE CLASSIFICATION OF INDUSTRIAL DIFFERENCES11/02/2005 02:33 PMPigou_0316 Page 4 of 551 III VOLUNTARY ARRANGEMENTS FOR CONCILIATION AND ARBITRATIONFOOTNOTESCHAPTER IV MEDIATIONFOOTNOTESCHAPTER V COERCIVE INTERVENTIONFOOTNOTESCHAPTER VI AN ANALYTICAL VIEW OF INDUSTRIAL PEACEFOOTNOTESCHAPTER VII HOURS OF LABOURFOOTNOTESCHAPTER VIII THE METHODS OF INDUSTRIAL REMUNERATIONFOOTNOTESCHAPTER IX THE DISTRIBUTION OF LABOUR AMONG OCCUPATIONS AND PLACESFOOTNOTESCHAPTER X EMPLOYMENT EXCHANGESFOOTNOTESCHAPTER XI UNEMPLOYMENT VERSUS SHORT TIMEFOOTNOTESCHAPTER XII THE PRACTICABILITY OF INTERFERENCE TO RAISE WAGESFOOTNOTESCHAPTER XIII METHODS OF ENGAGING LABOURFOOTNOTESCHAPTER XIV INTERFERENCE TO RAISE WAGES IN PLACES AND OCCUPATIONS WHERE THEYARE UNFAIRFOOTNOTESCHAPTER XV FAIR

5 WAGES INSIDE PARTICULAR INDUSTRIESFOOTNOTESCHAPTER XVI FAIRNESS AS A VARIABLE RELATIONFOOTNOTESCHAPTER XVII INTERFERENCE TO RAISE WAGES IN PLACES AND OCCUPATIONS WHERE THEYARE ALREADY FAIRFOOTNOTESCHAPTER XVIII WAGE RATES AND CAPACITYFOOTNOTESCHAPTER XIX A NATIONAL MINIMUM TIME-WAGEFOOTNOTESCHAPTER XX FIXED AND FLUCTUATING WAGE RATES IN PARTICULAR INDUSTRIESFOOTNOTESPART IV THE DISTRIBUTION OF THE NATIONAL DIVIDENDCHAPTER I THE GENERAL PROBLEM OF DISHARMONY11/02/2005 02:33 PMPigou_0316 Page 5 of 551 II PARETO'S LAWCHAPTER III THE SUPPLY OF CAPITAL AND LABOURFOOTNOTESCHAPTER IV INVENTIONS AND IMPROVEMENTSFOOTNOTESCHAPTER V THE MANIPULATION OF WAGESFOOTNOTESCHAPTER VI RATIONINGFOOTNOTESCHAPTER VII SUBSIDIES TO WAGESFOOTNOTESCHAPTER VIII DIRECT TRANSFERENCES FROM THE RELATIVELY RICH TO THE RELATIVELYPOORFOOTNOTESCHAPTER IX THE EFFECT ON THE NATIONAL DIVIDEND OF THE EXPECTATION OFTRANSFERENCES FROM THE RELATIVELY RICHFOOTNOTESCHAPTER X THE EFFECT ON THE NATIONAL DIVIDEND OF THE EXPECTATION OFTRANSFERENCES TO THE POORFOOTNOTESCHAPTER XI BOUNTIES ON THINGS PURCHASED BY THE POORFOOTNOTESCHAPTER XII THE EFFECT ON THE NATIONAL DIVIDEND OF THE FACT OF TRANSFERENCE FROMTHE

6 RELATIVELY RICH TO THE POORFOOTNOTESCHAPTER XIII A NATIONAL MINIMUM STANDARD OF REAL INCOMEFOOTNOTESAPPENDICESAPPENDIX I UNCERTAINTY-BEARING AS A FACTOR OF PRODUCTIONFOOTNOTESAPPENDIX II THE MEASUREMENT OF ELASTICITIES OF DEMANDFOOTNOTESAPPENDIX III A DIAGRAMMATIC AND MATHEMATICAL TREATMENT OF CERTAIN PROBLEMS OFCOMPETITION AND MONOPOLYI NORMAL SUPPLY PRICEII MANY-FIRM INDUSTRIESIII ONE-FIRM INDUSTRIESIV THE IDEAL OUTPUT IN A MANY-FIRM INDUSTRYV THE IDEAL OUTPUT IN A ONE-FIRM INDUSTRYVI DEMAND PRICE AND MARGINAL DEMAND PRICE11/02/2005 02:33 PMPigou_0316 Page 6 of 551 SIMPLE MONOPOLY AND MAXIMUM PRICESVIII SOME PROBLEMS OF DISCRIMINATING MONOPOLYIX METHODS OF INDUSTRIAL REMUNERATIONX THE MEANING OF EXPLOITATIONFOOTNOTES _____ ARTHUR CECIL pigou , THE ECONOMICS OF WELFARE (1920) THE ECONOMICS OF WELFAREMACMILLAN AND CO.

7 , LIMITEDLONDON BOMBAY CALCUTTA MADRASMELBOURNETHE MACMILLAN COMPANYNEW YORK BOSTON CHICAGODALLAS ATLANTA SAN FRANCISCOTHE MACMILLAN COMPANYOF CANADA, LIMITEDTORONTOTHE ECONOMICS OF WELFAREBYA. C. pigou , OF POLITICAL ECONOMY IN THE UNIVERSITY OF CAMBRIDGEFOURTH EDITIONMACMILLAN AND CO., LIMITEDST. MARTIN'S STREET, LONDON11/02/2005 02:33 PMPigou_0316 Page 7 of 551 MARTIN'S STREET, LONDON1932 COPYRIGHTF irst Edition 1920 Reprinted 1921 Second Edition 1924 Third Edition 1929 Fourth Edition 1932 PRINTED IN GREAT BRITAINBY R. & R. CLARK, LIMITED, EDINBURGHPREFACE TO THE THIRD EDITION (1928)IN preparing this revised third edition, I have removed a number of minor errors and havemade, I hope, some improvements in analysis and exposition.

8 I have also tried, so far aspossible, to bring my references to facts and laws up to date. The main changes in thestructure of the book are as follows. A portion of what used to be Chapter VIII. of Part IV. andthe Appendix entitled "Taxes on Windfalls" are omitted, as the matters there discussed are nowdealt with in A Study of Public Finance. The following Chapters are new: Part I., Chapter IV.;Part II., Chapter VIII.; Part III., Chapter XVI.; Part IV., Chapter VII. Chapter XI. of Part , under a new title, what used to be Chapter X. and has been entirely rewritten. Thefirst five divisions of Appendix III., which are concerned with the subject-matter of thatChapter, are also new. In these divisions I have made free use of an article entitled.

9 "AnAnalysis of Supply," which appeared in the Economic Journal in June 1928; and in the newChapter VII. of Part IV. I have used part of an article on "Wage Policy and Unemployment,"which appeared in the same journal in September scheme of the book, which is displayed in more detail in the Analytical Table of Contents, isas follows. In Part I. it is argued, subject, of course, to a large number of qualifications, thatthe economic WELFARE of a community of given size is likely to be greater (1) the larger is thevolume of the national dividend, and (2) the larger is the absolute share of that dividend thataccrues to the poor. Part II. is devoted to a study of certain principal influences of a generalkind by which the volume of the dividend is affected, and Part III.

10 To a study of influencesspecifically connected with labour. In Part IV. the question is raised in what circumstances it ispossible for the absolute share of the dividend accruing to the poor to be increased by causeswhich at the same time diminish the volume of the dividend as a whole; and the relation ofdisharmonies of this character, when they occur, to economic WELFARE is discussed. The twoParts contained in the first edition, which discussed respectively the Variability of the NationalDividend and Public Finance, are omitted from this, as they were from the second edition. Theirsubject-matter is now treated more fully in my Industrial Fluctuations and A Study in 02:33 PMPigou_0316 Page 8 of 551 have done my best, by restricting as far as possible the use of technical terms, by relegatingspecially abstract discussions to Appendices, and by summarising the main drift of theargument in an Analytical Table of Contents, to render what I have to say as little difficult asmay be.