{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

GWLecture6M - Part IIa Paper 1 General Equilibrium and...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Lecture 6M Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Marco van der Leij Office Hour: Tuesday 10-11 am
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 Outline: Efficiency and Equity Efficiency vs Equity and the Second Fundamental Theorem Cowell Ch. 9.3-9.3.2 Varian Ch. 31.13, First Best vs Second Best Cowell 13.7 Lump sum taxes
Background image of page 2
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.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 FT2 in an Exchange Economy O A O B x y e 1 B x A x e e + B y A y e e + e 2 Initial endowment Competitive equilibrium, no intervention Competitive equilibrium that maximises SWF SWF* To achieve SWF*, tax is imposed on individual A’s endowment, and this is transferred to individual B Tax and transfer are lump-sum since value of endowment is taken as given by each individual
Background image of page 4
Non-Convexity of indifference curves x y p A B Pareto Efficient Not supported by competitive equilibrium
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6 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
Background image of page 6
7 Implications There are two distinct reasons for government intervention (under the assumptions of the FT2) : 1. To redistribute: competitive market may not lead to
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}