Economic Policy-student - EconomicPolicy:EconomicGrowth...

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Economic Policy: Economic Growth,  Efficiency, & Equity POL 1101 - Matisoff
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Efficiency Adam Smith - Wealth of Nations - 1776 The Invisible Hand Private individuals following private interest leads to efficient outcome in public interest Too much corruption - those entrusted to govern can’t be trusted to lead in public interest Search for profits by enterprises will lead to firms producing needed goods
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Efficiency Pareto Efficiency / Optimality When it is not possible to make anyone better off, without making someone worse off Pareto Improvement Make someone better without making anyone worse
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Fundamental Theorems of Welfare Economics A competitive economy is Pareto efficient (given restrictive set of assumptions) A Pareto efficient distribution can be attained through a decentralized market mechanism and a redistribution of initial wealth What other criteria might we be interested in other than efficiency?
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Assumptions of the competitive model Large # of producers and consumers - producers are price takers Homogeneity - all goods are the same Perfect and complete Information (know prices, know quality of goods) Equal access to resources, technology Free entry and exit (no barriers) Buyers and sellers act independently No Public Goods - All goods are private No Externalities No Transaction Costs Full Employment (about 2% unemployment)
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Problems with Competitive Model Static, rather dynamic Models are simplifications of reality Models show supply and demand for several goods, several firms, difficult to incorporate ‘all’ goods and services The assumptions of the model are always violated
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Utility Functions and the Pareto Principle Pareto improvements are optimal, but how do we make choices involving tradeoffs? Utilitarianism Benthamite Utility Function Bergson – Samuelson (social) Utility Function Rawlsian Utility Function Coasian Bargaining Rawlsianism
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Utilitarianism Simply - The Greatest Good, or Maximizing the Average Utility among individuals Jeremy Bentham ‘An Introduction to the Principles of Morals and Legislation’ (1789)
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