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GWLecture10 - 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: Arrow Definition Desirable Properties Three possible resolutions of impossibility! Focus on information requirements for individual utility functions Books: Varian: Ch. 33 Cowell: Ch. 9.2
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3 Arrow (1951): Social Choice Rule Where does Bergson-Samuelson Social Welfare function come from? how does society aggregate individual preferences into a social ordering? B-S SWF: mechanism for making decisions about which allocation is optimal given social preferences about inequality Arrow Social Choice Rule: is there a function (or rule) which generates these social preferences? (Social Welfare Functional or Constitution) Function of individual preference orderings Function of cardinal and individually comparable utility values
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4 Impossibility Theorem Does there exist a social choice rule, F, that satisfies certain desirable requirements? Needs to generate a social preference ordering from individual preference orderings ordinal utility / ordinal social welfare Arrow: No, impossible
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