A move from point 1 to 2 does not change social welfare because the utility of better Arrow’s Impossibility
Theorem: Social Choice
off persons B increases but there is no change in the utility of less well off person A. and Individual Values
Yet this change is Pareto improvement because person B is made better off and
person A is not worse off. Pareto improvement can therefore occur but Rawls’s
social welfare function recognizes no social improvement if better off is not the
‘weakest link’ in the society. Social welfare increases as the consequence of a
change from point 1 to point 3 in figure 4.5 because this change increases the utility
of weakest link person A.
An alternative approach to defining social welfare is associated with the English
Political Economist Jeremy Bentham (1748-1832). Bentham proposed that a society
should follow the objective of seeking “the greatest good for the greatest number”.
The social objective has been interpreted as implying that social welfare is defined
by adding the utilities of everybody in society though strictly speaking; it is not correct.
For, n people in a society the social welfare function is, therefore,
W = U1 + U 2 + U 3 + .............. + U n
When society consists of two people, social welfare is the sum of utilities.
W = UA + UB
UB ↑
W1 W2
45 0 45 0
O X
UA →
Fig. 4.6: Bentham’s Social Welfare Function
In Figure 4.6 the straight lines with slopes of 45o indicate perfect substitutability in
social welfare between the utility of one person and the utility of another. All that
matter for social welfare is the sum of utilities. The distribution of utilities does not
matter. Rawls and Bentham are limiting cases of a general social welfare function.
Rawls care only about distribution and only about the worst person. Bentham is
indifferent to distribution and wants the sum of utilities to be maximized without
regard for distribution.
7
Social Choice and Collective Check Your Progress 2
Decision Making
1) What do you mean by a Social Welfare Function?
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
2) Explain Samuelson-Bengson’s Social Welfare Indifference Curves.
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
3) Compare and Contrast Rawls’s and Bentham’s Social Welfare Functions.
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
4.4 ARROW’S IMPOSSIBILITY THEOREM
Arrow has made an attempt to translate individual preferences in terms of collective
choice. In order to understand the proposition, we require at least three persons
and minimum there outcomes.
Further, Arrow has considered the concept of ‘Rationale Collective Choice’, which
need conform to the following axioms necessarily.
1) Unrestricted Domain: (U)
Let X, Y and Z are three individuals and A, B and C, are three outcomes (social
states). The preference patterns of these three individuals are as follows:
X: A > B >C (> means preferred to)
Y: B > C >A
Z: C > B >A
According to Arrow always there will be a pair wise comparison. In this example
for each individual there are three possible pair wise comparisons such as between
(A, B), (B, C) and (C, A) and there are three possibilities (>, Preferred to), (<,
inferior to), or (i, indifferent to). No restriction is imposed on any of the individuals
to state the comparison of outcomes in any pair in a specific manner. Therefore, the
nine possibilities, applicable to all individuals, are:
8
A > B, B>C A>C Arrow’s Impossibility
Theorem: Social Choice
or A < B, or C> B or, C > A and Individual Values
or A iB or B i C or, A i C
2) Independence of Irrelevant alternatives: (1)
In the pair wise comparison of (A, B) C option is treated as irrelevant. When there
is change in the comparison patterns of (B, C) and (A, C) it does not affect (A, B).
3) Paretian Condition: (P)
If for X:A > B and Y:A i B, then A>B.
It implies that A > B is the group choice so that the welfare of X is increased without
any harm to Y.
4) Non-Dictatorship: (D)
If for X: A > B, Y: B > A and Z: B > A, but in the group choice some how X manages
to fix A > B, then X is termed as a dictator. If it does not occur then there is non-
dictatorship.
5) Transitivity: (T)
For any individual or group if X > Y and Y > Z implies X > Z then transitivity
condition gets fulfilled.
Arrow has proved that it is not possible to fulfill all the above axioms simultaneously.
At least one of the axioms get violated. Therefore it is not possible to derive Rational
Collective Choice. This is known as Arrow’s Impossibility Theorem. According to
Arrow no Social Welfare Function (SWF) exists which satisfies the four conditions,
U, P, 1 and D, and can produce a transitive preference ordering over social states.
Proof of Arrow’s Theorem
The proof of the theorem (which is the one given by Sen (1970) is described below
for three persons X, Y and Z and three alternative choices A, B and C.
1) Let X: A > B > C,
Y: B > A,
Z: B > C.
To fix the comparison in the group choice between (A, B) there is difficulty since for
individuals the comparison between (A, B) differs for revealing their preference.
This leads to indecisiveness in the group choice.
Suppose somehow in the group choice A > B appears. Then X is termed as decisive
for fixing this pair in the group choice.
∴ X is Decisive: A > B
as such B > C (Paretian condition)
It implies that A >C (Transitivity relation)
