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GWLecture11 - 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 Conditions for Pareto Efficiency First Fundamental Theorem Efficiency vs Equity and the Second Fundamental Theorem Books: Cowell Ch. 9.3-9.3.2 Varian Ch. 31.9-31.13, 32.7-32.14
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3 First Best and Second Best First Best: an allocation which is Pareto efficient subject only to overall resource constraints and technology constraint Second Best an allocation which is Pareto efficient subject to resource constraints and additional constraints (eg. imperfect information)
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4 First Best Pareto Efficiency Nothing about prices in defining first-best allocation All goods are private: rivalrous (if one person consumes a good, this uses up the good and so no one else can consume it) excludable (one person can stop another from consuming the good) Conditions for Pareto Efficiency: Production efficiency Consumption efficiency Overall efficiency
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5 ( 29 x x x L K L K L K f y y x x , max , , , subject to: ( 29 ( 29 [ ] x x y x x x L K L L K K f y L K f x x - - - + , , max , λ F.O.C.s ( 29 ( 29 y x x y x x x x K L L K K f K L K f - - - = , , λ ( 29 ( 29 y x x y x x x x L L L K K f L L K f - - - = , , λ ( 29 x y x y y y y L L L K K K y L K f + = + = = ; , Production Efficiency ( 29 ( 29 ( 29 ( 29 y y y y y y x x x x x x K L K f L L K f K L K f L L K f =
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