Efficiency and Equity in Welfare Economics: 661 (Lecture Notes in Economics and Mathematical Systems)

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Whether unidimensional or multidimensional in nature, most applications of both the welfarist and the non-welfarist approaches to poverty measurement do recognize the role of heterogeneity in characteristics and in socio-economic environments in achieving well-being. Streeten, Burki, UI Haq, Hicks, and Stewart and others have nevertheless argued that the basic needs approach is less abstract than the welfarist approach in recognizing that role. Indeed, as mentioned above, assessing the fulfillment of basic needs can be seen as a useful practical and operational step towards appraising the achievement of the more abstract "functionings".

Clearly, however, there are important degrees in the multidimensional achievements of basic needs and functionings. For instance, what does it mean precisely to be "adequately nourished"? Which degree of nutritional adequacy is relevant for poverty assessment? Should the means needed for adequate nutritional functioning only allow for the simplest possible diet and for highest nutritional efficiency? A multidimensional approach extends them to several dimensions.

In addition, how ought we to understand such functionings as the functioning of self-respect? The appropriate width and depth of the concept of basic needs and functionings is admittedly ambiguous, as there are degrees of functionings which make life enjoyable in addition to making it purely sustainable or satisfactory. Furthermore, could some of the dimensions be substitutes in the attainment of a given degree of well-being? That is, could it be that one could do with lower needs and functionings in some dimensions if he has high achievements in the other dimensions?

Such possibilities of substitutability are generally ignored and are indeed hard to specify precisely in the multidimensional non-welfarist approaches. A second alternative to the welfarist approach is called the capability approach, also pioneered and advocated in the last three decades by the work of Sen. The capability approach is defined by the capacity to achieve functionings, as defined above. In Sen 's words,.

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Capability is, thus, a set of vectors of functionings, reflecting the person's freedom to lead one type of life or another, p. What matters for the capability approach is the ability of an individual to function well in society; it is not the functionings actually achieved by the person per se. Having the capability to achieve "basic" functionings is the source of freedom to live well, and is thereby sufficient in the capability approach for one not to be poor or deprived.

The capability approach thus distances itself from achievements of specific outcomes or functionings. In this, it imparts considerable value to freedom of choice: a person will not be judged poor even if he chooses not to achieve some functionings, so long as he would be able to achieve them if he so chose. This distinction between outcomes and the capability to achieve these outcomes also recognizes the importance of preference diversity and individuality in determining functioning choices.

It is, for instance, not everyone's wish to be well-clothed or to participate in society, even if the capability is present. An interesting example of the distinction between fulfilment of basic needs, functioning achievement and capability is given in Townsend 's Table 6. This deprivation index is built from answers to questions such as whether someone "has not had an afternoon or evening out for entertainment in the last two weeks", or "has not had a cooked breakfast most days of the week".

Joseph Eugene Stiglitz – Knihovna VŠE – Vysoká škola ekonomická v Praze

It may be, however, that one chooses deliberately not to have time out for entertainment he prefers to watch television , or that he chooses not to have a cooked breakfast he does not want to spend the time to prepare it , although he does have the capacity to have both. That person therefore achieves the functioning of being entertained without meeting the basic need of going out once a fortnight, and he does have the capacity to achieve the functioning of having a cooked breakfast, although he chooses not to have one.

Income shows the capability to consume, and "consumption functioning" can be understood as the outcome of the exercise of that capability. There is consumption only if a person chooses to enact his capacity to consume a given income. In the basic needs and functioning approach, deprivation comes from a lack of direct consumption or functioning experience; in the capability approach, poverty arises from the lack of incomes and capabilities, which are imperfectly related to the functionings actually achieved.

Although the capability set is multidimensional, it thus exhibits a parallel with the unidimensional income indicator, whose size determines the size of the "budget set":. Just as the so-called 'budget set' in the commodity space represents a person's freedom to buy commodity bundles, the 'capability set' in the functioning space reflects the person's freedom to choose from possible livings Sen , p. This shows further the fundamental distinction between the extents of freedoms and capabilities, the space of achievements, and the resources required to generate these freedoms and to attain these achievements.

To illustrate the relationships between the main approaches to assessing poverty, consider Figure 1. Figure 1. The northeast quadrant shows a typical budget set for the two goods and for a budget constraint Y1. The curve U1 shows the utility indifference curve along which the consumer chooses his preferred commodity bundle, which is here located at point A.

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The northwestern and the southeastern quadrants then transform the consumption of goods T and C into associated functionings F T and F C. Using these transformation functions, we can draw a budget constraint S1 in the space of functionings using the traditional commodity budget constraint, Y1. Since the consumer chooses point A in the space of commodities, he enjoys B's combination of functionings. But all of the functionings within the constraint S1 can also be attained by the consumer.

The triangular area between the origin and the line S1 thus represents the individual's capability set. It is the set of functionings which he is able to achieve. Now assume that functioning thresholds of z C and z T must be exceeded or must be potentially exceeded for one not to be considered poor by non- wel-farist analysts. Given the transformation functions TC T and TC F , a budget constraint Y1 makes the individual capable of not being poor in the functioning space. But this does not guarantee that the individual will choose a combination of functionings that will exceed z C and z T : this also depends on the individual's preferences.

At point A , the functionings achieved are above the minimum functioning thresholds fixed in each dimension. Other points within the capability set would also surpass the functioning thresholds: these points are shown in the shaded triangle to the northeast of point B.

Introduction to welfare economics and pareto optimality

Since part of the capability set allows the individual to be non-poor in the space of functionings, the capability approach would also declare the individual not to be poor. So would conclude, too, the functioning approach since the individual chooses functionings above z C and z T. Such a concordance between the two approaches does not always prevail, however. To see this, consider Figure 1. The commodity budget set and the functioning Transformation Curves have not changed, so that the capability set has not changed either.

Shapley–Folkman lemma

But there has a been a shift of preferences from U1 to U2 , so that the individual now prefers point D to point A , and also prefers to consume less clothing than before. This makes his preferences for functionings to be located at point E , thus failing to exceed the minimum clothing functioning z C required.

Hence, the person would be considered non-poor by the capability approach, but poor by the functioning approach. Whether an individual with preferences U2 is really poorer than one with preferences U1 is debatable, of course, since the two have exactly the same "opportunity sets", that is, have access to exactly the same commodity and capability sets. An important allowance in the capability approach is that two persons with the same commodity budget set can face different capability sets.

This is illustrated in Figure 1. This may due to the presence of a handicap, which makes it more costly in transportation expenses to generate a given level of transportation functioning disabled persons would need to expend more to go from one place to another. This shift of the TC T curve moves the capability constraint to S1' and thus contracts the capability set.

With the handicap, there is no point within the new capability set that would surpass both functioning thresholds z C and z T. Hence, the person is deemed poor by the capability approach and necessarily so by the functioning approach. Whether the welfarist approach would also declare the person to be poor would depend on whether it takes into account the differences in needs implied by the difference between the TC T and the curves.

For the welfarist approach to be reasonably consistent with the functioning and capability approaches, it is thus essential to consider the role of transformation functions such as the TC curves. If this is done, we may in our simple illustration at least assess a person's capability status either in the commodity or in the functioning space. According to the capability approach, the capability set must contain at least one combination of functionings above z C and z T , and this condition is just met by the capability constraint S2 that is associated with the commodity budget Y2.

Hence, to know whether someone is poor according to the capability approach, we may simply check whether his commodity budget constraint lies below Y2. Even if the actual commodity budget constraint lies above Y2 , the individual may well choose a point outside the non-poor functioning set, as we discussed above in the context of Figure 1.

Clearly then, the minimum total consumption needed for one to be non-poor according to the functioning or basic needs approach generally exceeds the minimum total consumption needed for one to be non poor according to the capability approach. More problematically, this minimum total consumption depends in principle on the preferences of the individuals. On Figure 1. Which one corresponds to the different approaches to assessing poverty seen above?

The measurement of capabilities raises various problems. Unless a person chooses to enact them in the form of functioning achievements, capabilities are not easily inferred. Achievement of all basic functionings implies non-deprivation in the space of all capabilities; but a failure to achieve all basic functionings does not imply capability deprivation.

This makes the monitoring of functioning and basic needs an imperfect tool for the assessment of capability deprivation. Besides, and as for basic needs, there are clearly degrees of capabilities, some basic and some deeper. It would seem improbable that true well-being be a discontinuous function of achievements and capabilities.

For most of the functionings assessed empirically, there are indeed degrees of achievements, such as for being healthy, literate, living without shame, etc.. The multidimensional nature of the non-welfarist approaches also raises problems of comparability across dimensions. How should we assess adequately the well-being of someone who has the capability to achieve two functionings out of three, but not the third? Is that person necessarily "better off" than someone who can achieve only one, or even none of them?

Are all capabilities of equal importance when we assess well-being? The multidimensionality of the non-welfarist criteria also translates into greater implementation difficulties than for the usual proxy indicators of the welfarist approach. In the welfarist approach, the size of the multidimensional budget set is ordinarily summarized by income or total consumption, which can be thought of as a unidimensional indicator of freedom.

Joseph Eugene Stiglitz

Although there are many different combinations of consumption and functionings that are compatible with a unidimensional money-metric poverty threshold, the welfarist approach will generally not impose multidimensional thresholds. For instance, the welfarist approach will usually not require for one not to be poor that both food and non-food expenditures be larger than their respective food and non-food poverty lines. A similar transformation into a unidimensional indicator is more difficult with the capability and basic needs approaches.

One possible solution to this comparability problem is to use "efficiency-income units reflecting command over capabilities rather than command over goods and services" Sen , p. This, however, is practically difficult to do, since command over many capabilities is hard to translate in terms of a single indicator, and since the "budget units" are hardly comparable across functionings such as well-nourishment, literacy, feeling self-respect, and taking part in the life of the community.

But by how much does poverty vary among these capability-poor? A natural measure would be a function of the budget constraint. It is more difficult to make such measurements and comparisons within the non-money-metric capability set. The measurement of well-being and poverty plays a central role in the discussion of public policy.