Handout 1_sol.pdf - September 13th 2019 Email...

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Econ 522: Law and Economics September 13 th , 2019 TA: Meng-Chien Su Email: [email protected] Office Hours: Thursday 10:00-12:00 Social Sciences 6439 Handout 1: Efficiency 1 Review 1. Welfare Criteria (a) Terminology: • An improvement under certain welfare criterion means the change would improve welfare evaluated by the welfare criterion. • Outcome A dominates outcome B means A is an improvement from B. • An outcome is efficient under certain welfare criterion means no other change can be made to improve efficiency i.e. no further improvements can be made. (b) Pareto criterion • A Pareto improvement is any change to the economy which leaves someone strictly better off without making anyone worse off. (c) Kaldor-Hicks criterion • A Kaldor-Hicks (K-H) improvement is any change to the economy which increases the total value achieved by everyone in society. Value is measured by willingness to pay. (d) Alternative Criteria • New welfare criterion can be made by defining a new measure of “welfare”. For example, wealth can be a measure of welfare. As long as the measure is determined, we can compare the welfare level under different outcomes and determine whether one is an improvement over another. 2. Pareto v.s. K-H criterion • A Pareto improvement implies a K-H improvement. • K-H efficiency implies Pareto efficiency. • If a post-allocation transfer is allowed, a K-H improvement can be turned into a Pareto improvement. • In this class, when we mention “efficient” we will be using the K-H criterion. 1 Revised from Jonathan Becker’s discussion section handout in Fall 2018. 1
3. Sources of Inefficiency
• Legal barriers to trade. • Taxes. Exercises

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