Inequality and Social Welfare When Using Equivalence Scales

The use of equivalence scales for the measurement of inequality and social welfare poses a difficult ethical and technical dilemma. If all individuals are weighted equally while individual welfare measures are based on income or consumption per equivalent adult, then standard properties assumed in welfare economics can easily be violated. For example, a transfer from a rich household to a poorer one may result in an increase in inequality. To avoid such problems, individuals could be weighted according to their needs when computing inequality and social welfare measures. Yet this leads to treating individuals differently, with more weight granted to some than other in social welfare maximization, so that not all individuals will have the same marginal utility of income at the optimum solution