GWLecture11

GWLecture11 - 1 Part IIa: Paper 1 General Equilibrium and...

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Unformatted text preview: 1 Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje Reiche 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 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) 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 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 + = + = =...
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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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GWLecture11 - 1 Part IIa: Paper 1 General Equilibrium and...

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