Lecture_1_Welfare_Economics_2009

Lecture_1_Welfare_Economics_2009 - Welfare Economics An...

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    1 Welfare Economics: An  Overview How to measure impact of policies, institutions or  events on well-being of different individuals: choices with scarce resources when should “free market” forces prevail capitalism vs. socialism government  versus  market failure what are the economic impacts of policies what are international repercussions how to maximize efficiency  subject to constraints implications for equity  or income distribution
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2 Public economics has positive and normative objectives; it aims both to describe the effects of public policies and to evaluate them This agenda requires us to formulate models of human decision-making with two components – one describing choices, and the other describing well-being Using the first component, we can forecast the effects of policy reforms on individuals’ actions, as well as on prices and allocations Using the second component, we can determine whether these changes benefit consumers or harm them
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3 Traditionally, economists have made no distinction between the behavioral and welfare components of economic models Such a distinction has not been necessary because standard welfare analysis is grounded in the doctrine of revealed preference That is, we infer what people want from what they choose When evaluating policies, we attempt to act as each individual’s proxy, extrapolating his or her likely policy choices from observed consumption choices in related situations
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4 Welfare Analysis I Is this Policy/Institution Pareto–efficient? Welfare improving changes to an institution are defined to be mutually agreeable changes Policy x is deemed better than the policy y for an individual if and only if, given the opportunity, he would chose x over y Purpose: Welfare I is a tool for analyzing economic institutions and models Pareto optimality of an institution is a stability test: if an institution is not optimal, then we might expect it to change
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5 If an institution is stable and inefficient, maybe the model is incorrect Template for Welfare I: Pareto statements (farm subsidies are inefficient) are used to define new questions (what makes farm subsidies persist?) that lead to better models of the underlying institution Welfare I works because the welfare of an agent is defined to be synonymous with choice We can expect agents to gravitate towards welfare improving policies and institutions only if welfare is synonymous with what the agents perceive to be in their self-interest
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6 Welfare Analysis II The analyst posits an objective function W and asks which policy maximizes W The function W reflects the objectives of the policymaker Policymakers often pursue “sophisticated objectives” that cannot be captured by simple minded self-interest Welfare II attempts to capture those objectives and find the associated optimal policies
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Lecture_1_Welfare_Economics_2009 - Welfare Economics An...

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