First Best World Flashcards
Pareto Efficiency
a situation cannot be improved since it has reached its maximum point
Pareto Improvement
making someone better off without making someone else worse off
Social Optimum
improving society, considering that someone will be worse off
What does the Utility Possibility Curve highlight?
it reflects pareto improvement on a graph, with different options making someone else better off to maximise their utility
At any point in the UPC there is…
pareto improvement
On the UPC each point on the graph reduces…
one person’s utility and benefits the other one
First Welfare Theorem
argues that because individuals are rational actors, there are no externalities and there is perfect information
- markets can freely interact
- there is no government intervention (only if markets fail)
- Pareto Efficiency of resource allocation
Social Indifference Curve reflects
social optimum, thus, at any point of the curve actors will not always benefit (individual tradeoffs) but society as a whole will
What does the shape of the Social Indifference Curve tell us?
the level of equality
Social Indifference Curve
- Rawlsian
inequality based on extreme aversion
- total welfare is improved if someone else’s welfare is improved
Social Indifference Curve
- Utilitarianism
social welfare is indifferent to individual welfare
Second Welfare Theorem
allows for governments to intervene by firstly allocating and redistributing resources (change initial endowments) and then allowing for market competition and welfare
What are initial endowments?
these are all the wealth and resources actors have before engaging in market transactions
Why according to the First Best World, governments should not intervene?
Because it disrupts systems and distorts markets and its optimal resource allocation leading to less production and redistribution of goods.
- government intervenes through taxation
What happens to the UPC when government intervenes?
the UPC curve shifts to the left
