The Scope and Limits of Preference Sovereignty

Abstract

Economists use tastes as a source of information about personal welfare and judge the effects of policies upon preference satisfaction; neoclassical welfare economics is the analytical embodiment of this preference sovereignty norm. For an initial distribution of wealth, the welfare-maximizing outcome is the one that exhausts all possible gains from trade. Gains from trade are defined relative to fixed ordinal preferences. This analytical apparatus consists of both the Pareto principle, which implies that externality-free voluntary trades increase welfare, and applied costbenefit analysis, which attempts to weight costs and benefits when evaluating policies that are not Pareto improvements.