GWLecture12

GWLecture12 - Part IIa: Paper 1 General Equilibrium and...

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1 Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje Reiche
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2 Outline: Efficiency and Equity Second Welfare Theorem and Implications First Best vs Second Best Cowell 13.7 Lump sum taxes
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3 Second Fundamental Theorem If assumptions 1 to 3 hold, then any Pareto efficient allocation can be achieved by appropriate redistribution through an Ideal Lump-Sum Tax and leaving the competitive market to find prices.
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4 Implications of FT2 Decentralisation result: redistribute with limited government informational requirements decentralised decisions will lead to a first-best Pareto allocation (satisfy the marginal conditions) Separate out equity from efficiency: any point on the Pareto frontier can be achieved. there is no conflict between redistribution and achieving a first-best Pareto allocation
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5 Implications There are two distinct reasons for government intervention (under the assumptions of the FT2) : 1. To redistribute: competitive market may not lead to the Pareto efficient point that maximises social welfare 2. To correct market failure (due to failure of one of assumptions 1 to 3) to return to first best (eg use of Pigouvian taxes to correct externalities)
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6 Value of FT2 FT2 provides rationale for why government intervention may be desirable Assumptions (particularly on information) are very strong: FT2 is not valuable to understand what form interventions should take second best analysis of policy intervention
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This note was uploaded on 03/07/2012 for the course ECON 201 taught by Professor Cowell during the Spring '10 term at LSE.

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GWLecture12 - Part IIa: Paper 1 General Equilibrium and...

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