class15 - Class 15 Exchange (continued) Outline Pareto...

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lass 5 Exchange (continued) Class 15
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Outline areto Efficiency ± Pareto Efficiency ± Trading Mechanism ± Dictator ± Bargaining arket ± Market ± Walras’ Law ± First Welfare Theorem ± Second Welfare Theorem roduction (Next Time) ± Production (Next Time) Chapter 10.4 “Production and Trading
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Pareto Efficiency and Trade Contract Curve : Set of Pareto efficient allocations ± Idea: If a trading contract is final, it should be Pareto I J e efficient. Otherwise, traders would both be better off renegotiating. I D Individually Rational & Individually rational : An allocation q is dividually rational if I J I D Pareto Efficient individually rational if q J e J and q D e D D ; J ;
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Pareto Efficiency and Trade Pareto Efficiency : An allocation q is Pareto Efficient if there is no feasible allocation q’ , s. t. q’ J q J and q’ D q D or q’ D q D and q’ J q J I J I D MRS J =MRS D D ; J ; D ; J ; Observation: If q is an interior Pareto Efficient allocation, then: MRS J = MRS D If MRS J MRS D , mutually beneficial trade is possible if q is interior. If q is on the boundary, it can be Pareto efficient even if MRS J MRS D
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Trading Mechanism: Market arket q J2 e e J2 Market : Someone offers Jane and Denise to trade at p 1 and p 2 I d J2 Jane’s income y J : y J (p 1 ,p 2 )= p 1 e J1 + p 2 e J2 ane’s gross demand (d q J1 e J1 d J1
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class15 - Class 15 Exchange (continued) Outline Pareto...

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