Coursenotes_ECON301

We use a conceptual framework that incorporates a

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Unformatted text preview: ur is akin to the usual concept of an indifference curve. That is, a SWF contour is a curve that connects all of the combinations of individual welfare UA, UB having the same SWF level. W(UA, UB) = Thus, from a social point of view, every point on a social welfare contour is equally desirable. Society as a whole will be indifferent among all of the points on the same SWF contour. 193 Let's have a look at a few of the more famous social welfare functions. Just like individual utility functions, SWF can have any functional form such as square root, linear, Cobb-Douglas, Liontief, or CES. [1] The following SWF SWF = UA + UB indicates that society, as a whole, weigh consumers A and B equally by giving them the same weight of . This is a simple form of egalitarianism. UB 2 1 1 2 UA [2] On the other hand, the following SWF SWF = 2/3 UA + 1/3 UB indicates that society, as a whole, gives a larger weight to consumer A than consumer B. In other words, consumer A (say, the rich) is viewed as more important to society than consumer B (say, the poor). 194 UB 3 1 1 3/2 UA [3] Finally, the following SWF SWF = min{UA, UB} indicates that society, as a whole, identifies themselves as those having lower utility levels (say, the poor). This implies that society cares exclusively about a base minimum of utility for the poorest members of society. This is a simple form of the so-called Rawlsian Social welfare function. UB SWF contour for min {UA, UB} = 1 2 1 1 2 UA Fine. But does the SWF help us to break the indeterminacy of the Pareto Optimal Production model? 195 We'll use a diagram to show how the concept of a social welfare function can be used to break the indeterminacy of the problem. The choice problem of society as a whole is to choose one point out of infinitely many points on the Grand UPF. The analytical tools for this social choice problem consist of the following two curves: [1] an upward moving SWF contour representing social equity [2] a stationary Grand UPF representing economic efficiency The optimal choice for society is thus the point where the social welfare function contour is tangent to the Grand UPF (i.e. po...
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