IBE316-5-2 - IBE 316 Economic Policy Stiglitz Economics of...

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IBE 316 Economic PolicyStiglitz: Economics of the Public SectorChapter 5: E¢ ciency and Equity (part 2)Keisuke OTSUSophia University FLASpring 2008OTSU(Sophia University FLA)IBE 316Spring 20081 / 17
OverviewFocus Questions1How do economists think systematically about how to make socialchoices when there are trade-o/s between the welfare of individuals?2How do economists think systematically about the trade-o/s betweene¢ ciency and inequality?3As a practical matter, how do governments translate these generalprinciples into a form which can actually be used in decision making?OTSU(Sophia University FLA)IBE 316Spring 20082 / 17
Analyzing Social ChoicesThe social choice should be made by maximizing the social welfaresubject to the opportunity setopportunity set: utility possibility frontiersocial welfare: social indi/erence curveOTSU(Sophia University FLA)IBE 316Spring 20083 / 17
Social Choices in PracticeGovernment O¢ cials cannot derive utility possibilities frontiers or writedown social welfare functionsInstead they;1attempt to identify and measure the net bene°ts received by di/erentgroups2ascertain whether the project is a Pareto improvement3If the project is not a Pareto improvement1undertake if it has net positive e¢ ciency e/ects and reduces inequality2do not undertake if it has negative e¢ ciency e/ects and increasesinequality3measure the trade-o/ when if it has positive e¢ ciency e/ects andincreases inequality and vice versaOTSU(Sophia University FLA)IBE 316Spring 20084 / 17

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