The Community Indifference Curves | Trade Equilibrium | Economics

In this article we will discuss about the community indifference curves with its criticisms.

Just as an indifference curve pertaining to an individual consumer depicts different combinations of the two commodities which provide equal satisfaction and are, therefore, equally preferred, similarly a community indifference curve or social indifference curve represents such combinations of two commodities which give equal satisfaction to the community and it is indifferent about those combinations.

The community indifference curves are derived by the aggregation of the indifference curves of all the individuals in the society. Since all combinations on a social indifference curve yield the same level of satisfaction, the increase in the quantity of one commodity must correspond with some decrease in the quantity of other commodity. Consequently the community or social indifference curve slopes downwards from left to right as shown in Fig. 4.2.

In Fig. 4.2, IC is the community indifference curve. The two combinations A and B of commodities X and Y are supposed to give equal satisfaction to the community. Combination A includes OQ of X + OP of Y and combination B includes OQ₁ of X + OP₁ of Y. In combination B, as society increases the consumption of X by QQ₁, it reduces at the same time, the consumption of Y by PP₁ so that compensating variation in satisfaction takes place and both the combinations A and B are equally preferred.

If a series of community indifference curves is shown such that higher the indifference curve, higher is the level of satisfaction from combinations lying upon it and vice-versa, that series of social indifference curves represents the community indifference map, which is shown in Fig. 4.3.

In Fig. 4.3, IC₁, IC₂ and IC₃ represent a community indifference map. The combinations A, B and C lie on IC₁, IC₂ and IC₃ respectively. The combination B includes more quantities of both the commodities than the combination A. The quantities of the two commodities in combination C are more than in combination B. Thus combination C gives more satisfaction than B and latter gives more satisfaction than A. Hence higher the indifference curve, higher is the level of satisfaction and vice- versa.

The slope of the indifference curve is measured by the marginal rate of substitution of X for Y (MRS_xy), MRS_xy is the quantity of Y which the society gives up in order to have some quantity of X commodity. It is measured by the ratio of a change in quantity of Y commodity to a change in the quantity of X commodity.

MRS_xy = – (δy/δx)

As the community increases the consumption of an additional unit of X, it may be willing to give up less and less quantities of Y. Consequently, the MRS_xy goes on diminishing and the community indifference curve follows the path of a negatively sloping convex curve to the origin.

Alike the indifference curve of an individual, the community indifference curve has the same set of properties:

(i) It slopes negatively;

(ii) It is convex to the origin; and

(iii) It is non-intersecting.

Criticisms of Community Indifference Curves:

The device of community indifference curves has been employed in the analysis of problems related to international trade by several prominent economists like Ellsworth, Johnson, Leontief, Sodersten and Vanek. There are, at the same time, several theorists who raised certain objections against their use.

These objections are as follow:

(i) Aggregation of Individual Tastes or Preferences:

The community indifference curve is derived through the aggregation of the preferences of the individual consumers. In their construction, a highly over-simplifying assumption is taken that taste patterns of consumers are identical. This assumption ignores the inter-personal differences in tastes. There is also no inconsistency between tastes of individuals and society from period to period.

The changes take place from time to time in the preferences of both individuals and community. These differences not only create problems in the aggregation of pattern of preferences but also necessitate changes in the indifference map of the society. It becomes difficult to state whether a community was better off before or after the change in tastes.

(ii) Cardinal Measurement of Utility:

The community indifference curve suffers from the defect of cardinal measurement of utility. When it is said that combination C is better than B and B is better than A (Fig. 4.3), it involves transitivity. The extent by which C and B are better than A, can be stated only on the basis of some explicit social welfare function which converts the ordinal into quantifiable cardinal utility. Without an international social welfare function, it is difficult to determine whether a gain of one dollar to country X is equivalent to one dollar (or more or less) of gain to another country.

(iii) Reliance on Compensation Principle:

The community indifference curves inherently involve the inter-personal comparisons of utility. The problems created by such comparisons were sought to be overcome by Scitovsky through the use of compensation principle. If the increase in income due to price change is enough to compensate the loss of the losers and makes at least one person better off, there is an improvement in social welfare.

If the compensation principle is found meaningful, the community indifference curves can have some relevance. But alike other welfare criteria, the compensation principle has its theoretical and practical pitfalls. The compensation principle involves a strict value judgment which is not universally applicable.

(iv) Changes in Distribution of Income:

Metzler pointed out that the real national income and its distribution among individuals has much effect upon the community indifference curves. As the international trade causes changes in the distribution of income, there may also be shifts in these curves. It creates problems in the specific determination of meaningful indifference curves for the country as a whole.

(v) Changes in Factor Prices:

According to Johnson, the distribution of income can remain stable only if the factor prices and preferences remain constant. However, if international trade or domestic productive activity results in a change in factor prices, the income distribution will change. This will cause a shift also in the weights assigned to different people’s preferences in the aggregation of the preference system.

(vi) Difficulty in the Measurement of Price Change:

Kindelberger does not doubt the possibility of change in factor prices. He has raised a fundamental objection that it is operationally difficult or almost impossible to measure the pre- trade and post-trade change in prices. Unless the extent of price variation is precisely determined, it is not only difficult to measure exactly the income distribution but difficulty arises also in the determination of trade equilibrium.

In view of its structural and practical deficiencies, Haberler dismissed this device as unsatisfactory. Vanek recognised that the concept was used frequently but it was weak and shaky. While making assessment of the community indifference curve.

Stevens says that there is “a striking contrast between the quite vague and tenuous nature of the concept of reliable commodity indifference curves on the one hand, and the definite and forcefully stated conclusions which those who use them claim to reach.” Despite its flaws, many economists still rely upon them for analysing trade equilibrium and several other fields of economic investigation.