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EC320 PUBLIC POLICY > LECTURE 1 > Flashcards

LECTURE 1 Flashcards

1
Q

1st welfare theorem

A

The allocation of commodities in a competitive equilibrium = Pareto efficient.

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2
Q

4 conditions for 1st welfare theorem to hold

A
  1. No externalities.
  2. Perfect competition - price takers.
  3. Perfect information.
  4. Rational agents.
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3
Q

Pareto efficient =

A

impossible to find a technologically feasible allocation the makes someone better off without making some one else worse off.

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4
Q

What kind of requirement is PE? Why is it not necessarily equitable?

A

Desirable, but weak - one person consuming everything is PE.

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5
Q

2nd welfare theorem

A

any PE allocation can be made a market equilibrium.

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6
Q

V. important condition for 2nd welfare theorem to hold. What does it mean?

A

CONVEX preferences = concave ICs = averages > extremes - one of axioms of well-behaved ICs.

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7
Q

How can any PE allocation be made a market equilibrium?

A

BY redistributing initial endowments - individualised lump sum taxes based on individual characteristics, not behaviour. Then let market work freely.

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8
Q

Why does 2nd welfare theorem not work in reality?

A

Government cannot observed individual characteristics and so cannot use lump sum taxes. End up using distortionary taxes on economic behaviour.

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9
Q

Illustration of 2nd welfare theorem problem with disabled vs able population.

A

In free market outcome, disabled have no earnings and able earn say $100. 2nd welfare theorem = government can tell them apart even if able do not work so can lump sum tax for able at $50 and give to disabled. Able have an incentive to keep working as still taxed regardless. In reality, gov can only tax those who work = disincentive to work.

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10
Q

state 4 market failures

A
  1. externalities.
  2. imperfect competition
  3. imperfect / asymmetric information
  4. Individual irrationality.
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11
Q

4 types go government intervention

A
  1. taxes and subsidies
  2. quantity regulation
  3. public provision
  4. public financing.
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12
Q

How do public provision and public financing differ>

A 
Provision = gov directly provides it.
Financing = gov pays for it, but private sector provides it.
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13
Q

Direct effects of government intervention capture…

A

The effects of the intervention if individuals did not change their behaviour. Relatively easy to compute.

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14
Q

Indirect effects of government intervention capture…

A

The effects of intervention that arise because individuals change their behaviour in response = unintended effects.

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15
Q

3 reasons government provision may not be desirable…

A
  1. Information problems: what Q if gov cannot capture all preferences.
  2. DWL due to myopia and max own utility.
  3. Incentive effects.
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16
Q

Political economy

A

the theory of how political process produces decisions that affect the economy.

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17
Q

Public choice =

A

a sub-field of political economy from a Libertarian perspective that focuses on gov failures.

18
Q

NORMATIVE public economics =

A

how things SHOULD be: subjective and theoretical.

19
Q

POSITIVE public economies =

A

analysis of how things rly are: objective, empirical.

20
Q

Paternalism/Libertarian view of gov =

A

Individual failures don’t exist and gov tries to impose its own preferences against individuals will.

21
Q

Behavioural economic view of gov

A

Individual failures exist = need intervention

22
Q

Decentralised states =

A

larger % of taxes and spending that place at the local level.

23
Q

What is voting with your feet and how does it come about

A

When states are decentralised individuals can move and this creates competition between local governments.

24
Q

Why is redistribution harder to achieve at local level;?

A

Since rich can just leave state if taxes too high - bit can’t leave country.

25
Q

2 types of spending + egs.

A

Public goods.

Social spending e.g. education, insurance, pensions.

26
Q

How does CS depend on PED?

A

More elastic = less CS

Inelastic = more CS

27
Q

How does PS depend on PES?

A

Inelastic = more PS

28
Q

CS + PS is maximised when…

A

D=S at competitive equlibrium

29
Q

DWL =

A

The reduction in social efficiency from denying trades fo which benefits > costs when quantity differs from socially efficient quantity.

30
Q

The DWL triangle always points to…

A

social optimum

31
Q

What does a social welfare function do?

A

Combine utility functions of all individuals into an overall social utility fucntion.

32
Q

Utilitarian / Benthamian SWF

A

maximise sum of all utilities.

U1 + … + Un

33
Q

Rawlsian SWF

A

maximise utility of least well off member.

Min(U1 –> Un)

34
Q

How do utilitarian and Rawlsian compare on redistribution implications?

A

Utilitarian: MU of income declines with incomes transfers from rich to poor increase total utility.
Rawlsian = even more redistribution - extract as much tax from rich as possible.

35
Q

Utilitarian cares about … income & implications on consumption lovers.

A

NET income

people who enjoy consumption more should get more income.

36
Q

Empirically: do people think consumption loving matters?

A

NO - contracts with utilitarian

37
Q

Empirically: do people think hard working more deserving?

A

either more deserving or equally deserving conditional on total earnings.

38
Q

Empirically: do people think ability to work matters?

A

Yes - most deserving are those who are disabled / unemployed but looking for work.

39
Q

conclusion on empirical results relating to redistribution

A

People favour redistribution if they feel inequality are unfair i.e. individuals have no control.
but unfair means different tings to different people.

40
Q

Utilitarian vs libertarian views on whether disposable income or taxes matter.

A 
Utilitarian = only disposable income matters
Libertarian = only taxes paid matters.
41
Q

Empirically, do we see support for utilitarian or libertarian view?

A

taxes paid positively affects deservedness = libertarian

But disposable income -VE affects deservedness = utilitarian - both matter for social preferences.

EC320 PUBLIC POLICY (7 decks)

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