Outsiders to economics might be forgiven for thinking that welfare economics provides the theoretical underpinnings for the welfare state. But although the language is suggestive, the link between theoretical welfare economics and policy recommendations concerning the role of the public sector, the optimal degree of redistribution and social insurance, etc. is not obviously a very strong one. Economists who use a welfare theoretic framework for thinking about economic and social problems might be led to advocate a "night watchman state"' which would mainly be concerned with the provision of public goods or, alternatively, to argue for a crucial role of the public sector as a redistributive system, as in the welfare state. What is the welfare state? It is always tempting to avoid issues of definition, but in this case it seems appropriate to point out that the concept is in fact used in at least two different ways. Some use it to denote a subsection of the public sector, concerned with redistribution (via social security and social assistance) and the provision of those social goods which have a strong redistributive element, like health care and education. Others use the term in a much wider sense to characterize the economic and social policies of a country that gives high priorities to equality and individual protection against social hazards. To illustrate the difference in usage, according to both definitions unemployment insurance would definitely come under the heading of welfare state policies, whereas macroeconomic policies that are designed to prevent or reduce unemployment would be included in the second definition of welfare state policies, but not in the first. I am inclined to take the wider view of the welfare state, primarily because I feel that the more narrow definition introduces a number of rather awkward borderlines between the various areas of economic policy. In the following I first consider what bearing the neoclassical version of welfare economics has on the design of welfare policy. I then discuss