Net welfare gain – definition

A net welfare gain refers to the impact of a government policy, or a decision by firms, on total  economic welfare, taking into account the gains, less any losses.

While the concept of ‘welfare’ can have several meanings in economics, it corresponds closely to the idea of well-being. Economists have attempted to quantify it in various ways, including using the idea of ‘utility’ and ‘surplus’ to represent welfare.

The idea that welfare can be assessed by considering the ‘surplus’ that can be gained by consumers and producers from a transaction is attributed to English economist Alfred Marshall. From the consumer’s perspective, ‘surplus’ occurs when the price a consumer would be prepared to pay for a good or service is greater than the market price, and producer surplus is gained by a producer when the price they would be prepared to supply at is less than the actual price.

Marshall used demand and supply graphs the illustrate the idea of surplus. At equilibrium, welfare is maximised, as can be seen below:

net welfare loss

A gain in welfare could occur from several sources, for example, increasing the consumption of a merit good as a result of a government subsidy.