Baumol et al. (2008) claim that “GDP does not measure a whole series of activities that are not traded in the market but that nonetheless contribute to or detract from our overall sense of well-being, including: household activity, human health, selected activities of nonprofit organizations (especially those relying on volunteer labor), and environmental conditions". However, the biggest problem of welfare economics and income approach is the problem of handling externalities. In real life welfare of a person A depends not only on some activities of B, but some service of A to B might also involve some services to C, D or others (Baumol, 1965, 25), and this issue may not be understood so well . The modern economic theory makes a clear demarcation between positive economics and welfare economics. While the positive economics attempts to explain the working of the economic system, the latter helps in policy making and is therefore normative. Welfare economics raises three major issues: (a) does competition between buyers and suppliers lead to common good? (b) If distribution decisions are taken by an enlightened sovereignty, whether there should or should not be a reliance on market mechanisms? (c) What is common good and what is the true interest of society? (Feldman, 2008) Although the two need support from each other, the welfare economics goes beyond the predictions and explanations and suggests how to compensate those individuals and groups who have suffered from the pain of growth and development. The importance of examining the costs and gains of development for different sections of society cannot be overestimated.

According to Mishan (1969, 158-159), welfare criteria have two essential attributes: “(a) the ethical judgments made should command a consensus, and (b) the criteria should be logically tenable; in particular, they should be conceptually clear and unambiguous and, also, consistent in themselves if mutually contradictory recommendations are to be avoided.”