Marginal Utility of Welfare Function and Regional Welfare

Economists postulates that in order to achieve maximum welfare gain in the community, cost and benefit of investment projects should be distributed between individual on the base of marginal utility of income. A broader opinion is that even though poorer individuals may be less able to pay for a particular benefit, they may obtain greater utility from it. In line with the broader opinion, this paper looks at regional welfare weights in Iran on the basis of a conventional consumption utility function which assumes diminishing marginal utility. In this paper we investigate real per capita consumption of 28 provinces in 1385 with statistical point. and estimate marginal utility of consumption in Iran with econometric and time series technique. There is a significant difference in real per capita consumption between provinces if a project increase the income in all provinces in a same amount their effect on welfare increase will be different. Marginal utility of income in Iran is -1.56.the minimum welfare with belong to Tehran province and maximum to Sistan province. The use of distributional weights normally produces a systematic bias in investment analysis favoring projects that benefit the poor rather than the rich. This should not be regarded as being a distortion in the rational use of Scarce resources, but rather a manifestation of fundamental socio-economic objectives of the community who may wish to consider equity and efficiency objectives simultaneously. With the use of regional welfare weights the cost-benefit analysis will make the poor districts a much more favorable venue than the richer ones.