Lecture18Welfare - Introduction to Microeconomics Lecture...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Introduction to Microeconomics Lecture 18 Welfare and Externalities Simon Cowan
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Issues How can we compare different allocations of resources? Efficiency and the First Fundamental Theorem of Welfare Economics Equity and the Second Fundamental Theorem of Welfare Economics Social welfare functions Externalities and other market failures
Image of page 2
Pareto efficiency An allocation is Pareto efficient if there is no way to make someone better off without making someone else worse off If an allocation is not Pareto efficient then it is possible to make at least one person better off without harming anyone Such a move is a “Pareto improvement” A minimal requirement for public policy is to ensure that a Pareto efficient allocation is achieved
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Edgeworth Box and a Pareto improvement O A Cheese Dates O B The initial allocation at X is Pareto inefficient. Both Alice and Bob can be made better off by an allocation to the south-east in the area bounded by the indifference curves. Allocation Y is Pareto efficient. X Y
Image of page 4
The contract curve gives the set of Pareto-efficient allocations O A O B Z Contract curve = set of all Pareto efficient allocations. Indifference curves are tangential. Dates Cheese Y
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
First Theorem of Welfare Economics Any competitive equilibrium is Pareto efficient Invisible Hand of Adam Smith Each agent maximizes her/his objective (utility, profits) selfishly The result is not chaos but an efficient allocation Role for government? Income distribution Correcting market failures
Image of page 6
Some intuition Each agent maximizes utility subject to their budget constraint So their marginal rates of substitution equal relative prices All agents face the same relative prices So marginal rates of substitution are the same for all agents The allocation is on the contract curve and is efficient
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Assumptions for First Theorem No externalities Agents don’t care about what others consume No pollution Complete set of markets
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern