introduction to paretian welfare economics Flashcards
what are the two strands associated with modern welfare economics?
there is one associated with utilitarianism which sees welfare as dependent on outcomes. the other is associated with the contrarian tradition which sees the welfare of the society dependent on processes
what is pareto optimality?
if it is impossible to make at least one person better off without making some one else worse off
what is a pareto improvement?
a change in the economy that leaves at least one person better off and no one else worse off
what is the objective of welfare economics>
the objective is to maximise social welfare subject to the constraints of resource technology and tastes
what are the three conditions for pareto optimality?
efficiency in exchange/consumption , technological/production efficiency and product mix efficiency
what does efficiency in the exchange/consumption require?
it requires that individuals A and B have the same relative valuation (their subjective valuation) of the two goods X and Y
what does efficiency in the technological/ production efficiency require?
it requires the marginal rate of technical substitution between the two factors K and L is the same in the production of X and Y
what does product mix efficiency require?
it requires that the individuals shared relative valuation of the goods X and Y should equal the marginal rate of transformation between the two goods
what is the flaw with the pareto critierion?
it is an efficiency criterion that gives us little or no guidance on issues of distribution or fairness
what is the relationship between perfectly competitive economies and pareto optimality?
under certain classical assumptions such as non increasing returns and no externalities etc, a perfectly competitive economy will attain a pareto optimum equillibrium
what are the three other ways to achieve a pareto equillibrium other than perfect competition?
perfect central planning ( langer), perfect computation (leontief) and perfect price discrimination
what is the advantage of using perfect competition in order to achieve pareto optimum equillibrium?
the information requirements for perfect competition is the smallest out of all the ways
what is the flaw with using perfect competition in order to achieve the pareto optimum equillibrium?
it requires assumptions such as no externalities and constant returns which are unrealistic in many markets such as education where there are significant postive externalities
what is the first theorem of welfare economics?
it statest hat the equillibrium in a set of competitive markets is pareto efficient
what is the second theroem in welfare economics?
it states that under certain conditions, every pareto efficient allocation can be achieved as a competitive equillibrium
