Discuss the basic difference in approach adopted by Pigou and Pareto to deal with problems of welfare economics.

But the level of well-being does not depend solely on production. It also depends on the distribution. Let us situate ourselves in the preparetian conception of utility (that is, in Pigou’s). If the functions of marginal utility are cardinal, independent and decreasing, it is clear that the maximum of total utility is obtained, for a given production, when the distribution is perfectly equal. In that case, in effect, we can not expect utility gains from the transfer of a unit of the “rich” agent (for which the marginal utility is low) to the poor agent. The rational limits of redistribution will then be reached when the national income begins to decrease. This is exactly what Pigou says: “as long as the global income does not decrease, any increase, in a wide range, of the real income enjoyed by the poorer classes at the expense of the richer classes entails an increase in the wellness”. Here, then, is a second reason to justify state intervention: the redistribution of income makes it possible to increase collective welfare. This recommendation undoubtedly lies in the interpersonal comparisons of utility, but it matters little: they also rest in a good sense and Pigou is perfectly reasonable.

But this is not all. Returning and developing the marshaliano concept of external effect and distinguishing the “social products” from the “private products”, Pigou will discover other domains for public intervention. In general, external effects are consequences of economic activities that are not taken into account by the market, and that is why the market is unable to ensure its regulation. In the case of positive external effects, certain agents benefit from the economic advantages without having mobilized resources to obtain them. Pigou gives the following examples: the creation of private parks that improve the environment, the construction of routes and the opening of tram lines that increase the value of adjacent land, the cleaning of private homes that benefit the whole street, the random and diverse discovery of fundamental inventions, as well as inventions and technological improvements that can not be patented or kept secret.

In the case of negative external effects, certain agents bear the disadvantages that can not make those who cause them pay. Pigou’s examples range from the peasant whose lands are invaded by the neighbor’s rabbits, to air and water pollution from industrial waste, through work accidents and occupational diseases, as well as the health consequences of the children of the work of pregnant women. In the spirit of Pigou have an objective: to show that the market economy is contaminated in all its aspects by mechanisms of an economic nature that are beyond its control. It is, according to the consecrated expression, “market failures”, for which it is necessary, on the one hand, to build a theory and, on the other hand, to imagine the political remedies capable of reducing them. Let’s see first the theoretical aspect. Whatever its nature, the external effects have the consequence of dissociating the net social marginal product from the net private marginal product. The first is defined as “the total net product of the marginal increase of resources in an environment or in a specific use, without seeking to know what resources any part of such product may come from”. In sum, it takes into account external effects. As for the latter, these are the part of the net social marginal product “that falls on the person who has invested in it their resources”. That is, without taking into account external effects. When there is a positive externality, the seconds are greater than the first, and vice versa.