Social Welfare Function

The use of natural resource revenues for achievement of development has been a challenging issue for resource abundant countries. These challenges stem from the fact that incomes from natural resources are non-durable, unpredictable and uncertain. Different countries have pursued various approaches and tools for managing these revenues to avoid economic fluctuations. The international organizations and economic experts propose a diversification in the use of resource revenues through different approaches of public investment. Maximizing the social welfare function has become a common guideline for resource revenue management in resource-rich countries. This article investigates the effect of public investment approaches and their impacts on intergenerational social welfare function of Iran. To this end, the impact of two public investment approaches, namely Permanent Income Hypothesis (PIH) and Bird In Hand (BIH), was examined and compared on a certainty equivalent of social welfare function. Results of the simulation with Iran's economic data indicated substantial positive loss in welfare if switching to the BIH approach. Calculations show that the certainty equivalent of social welfare function for PIH and BIH is 786.3 and 444.3, respectively. PIH provides a higher welfare level for the Iranian economy.

Objective : This study aims to develop and apply two advanced social welfare functions that enhance sensitivity to income inequality and risk aversion, focusing on improving the welfare of lower-income groups in the context of income tax policy design. Methods : The study critiques classical social welfare models—such as utilitarian and aggregative approaches—for their limited responsiveness to inequality and social behaviors. It introduces two alternative frameworks: i) A function based on the Atkinson inequality index, capturing societal aversion to income disparities. ii) A function utilizing constant relative risk aversion (CRRA) utility, modeling individual welfare under income volatility. These models evaluate the effects of varying income tax rates on overall social welfare, accounting for average income and its distribution across societal strata. Results : The analysis shows that increasing income tax rates across all income groups reduces social welfare due to lower post-tax incomes, even when redistribution is intended. Individuals with higher levels of risk aversion experience greater welfare losses, emphasizing the importance of incorporating inequality sensitivity and risk aversion into policy design. Conclusion : The proposed social welfare functions offer more robust analytical tools for optimizing income tax policies. They promote equitable income distribution and improved social welfare by integrating distributive justice and risk-averse behavior. These models provide practical guidance for policymakers balancing economic efficiency with social justice.