slides 1 Flashcards
What’s a market failure?
failure of the market economy to deliver an efficient
outcome
What’s the Primary motive for government intervention?
Primary motive for government intervention when
efficiency is the concern is therefore “market failure”.
Why should G intervene in the economy in the case the market is well-functioning? Please explain
Even if the market is well-functioning, an efficient
outcome is not necessarily socially desirable.
* Redistribution is a second reason for government
intervention.
* Redistribution: The shifting of resources from some
groups in society to others.
How Might Governments Intervene through taxes or subsidies?
Use the price mechanism, changing the price of a
good to encourage or discourage use.
* Taxes raise the price for private sales or purchases of
goods that are overproduced.
* Subsidies lower the price for private sales or purchases
of goods that are under-produced
How Might Governments Intervene through the restriction or Mandate Private Sale or Purchase?
o Quotas restrict private sale of goods that are
overproduced.
o Mandates require private purchase of goods that
are under-produced
How Might Governments Intervene through Public Provision?
The government can provide the good directly
How Might Governments Intervene through Public Financing on Private Provision?
Governments pays, private companies produce.
What’s pareto efficiency?
Pareto efficiency: it is not possible to improve the welfare of
one agent without reducing the welfare of another agent.
What’s a pareto improvement?
change that makes one agent better off
without making any other agent worse off
What’s social effiencey?
represents the net gains to society
from all trades that are made in a market, and it
consists of the sum of two components: consumer and
producer surplus. Also called total social surplus
What’s the second fundamental theorem of welfare economics?n
Second fundamental theorem of welfare economics:
Society can attain any efficient outcome by suitably
redistributing resources among individuals and then
allowing them to freely trade. however, society doesn’t typically have this nice choice. Rather,
society most often faces an equity–efficiency
trade-off, the choice between having a bigger economic pie and having a
more fairly distributed pie
What is Bergson-Samuelson Social Welfare Functions
functions that combine utility functions of all individuals into na
overall social utility function (interpersonal comparison of utilities
What is the Utilitarian Social welfare funtion? And does it give equal weitght to the utilities of everyone? What are the implication of this?
society’s goal is to
maximize the sum of individual utilities:
SWF =U1 + U2 + . . . +UN
yes, The utilities of all individuals are given equal weight, and summed to get
total social welfare. This formulation implies that we should transfer from
person 1 to person 2 as long as the utility gain to person 1 is greater than the
utility loss to person 2. In other words, this implies that society is indifferent
between one util (a unit of well -being) for a poor person and one for a rich
person.
Is the outcome of utlitarian social welfare function unfair?
No, because the social welfare functionis defined in terms of utility and not dollars. society is not indifferent
between giving one dollar to the poor person and giving one dollar to the rich
person; society is indifferent between giving one util to the poor person and
one util to the rich person. richer people
gain a much smaller marginal utility from an extra dollar than poorer people
When is utlitarian SWF maximized with a perfect equal distribution of income?
When individual are identical, then there is no cost of redistribution , there utiltiRIAN SWF is maximizide.
