Term 2 Week 3: Welfare Flashcards
What is a social choice problem (2)
-One common question is whether there is an objective method to evaluate the consequences of different policies, or whether it must always involve subjective judgement
-The social choice problem is how we decide to weigh the impacts of an event to evaluate the consequences
What is a social welfare function, and the different types (1, 4)
-A social welfare function provides a numerical score, which aggregates the welfare of individuals into a society wide measure, in order to choose between options
Some types of SWF include:
-Utilitarian (sum of all utilities)
-Dictatorial (compare only along one dimension (Wages))
-Weighted Utilitarian (weighted sum of all the utilities)
-Rawlsian (measure by the impact on the individual who is worse off)
What are Arrows perfect SWF properties, and impossibility theorem (5,1)
Arrow believed a perfect SWF would have:
1) Allow individuals to freely rank alternatives
2) Rank A > B when A > iB for all individuals i (Unanimity)
3) Ensure the decision rule accounts for the preferences of multiple individuals (no dictatorship)
4) Provide a complete, transitive ranking
5) Satisfy the ‘Independence of Irrelevant Alternatives’, where if we rank A>B where the options are {A, B, C}, we rank A>B if the options are {A, B, C, D}
-Arrows impossibility theorem is that with 3 or more options, there is no SWF to satisfy all these properties
What is the convention SWF in Economics, and the issue with this (1,2)
-There is no SWF, so the convention in economics is to choose the utilitarian function, the total surplus
The two main issues are:
-Measures the sum of utility without regard for distribution (inequality)
-And it makes interpersonal comparisons of utility
How can we use a demand and supply curve to measure welfare (2)
-The area under a demand could be a measure for the surplus utility at certain prices
-The area above the supply curve and below the price is the benefit the seller gets
What is a pareto improvement and pareto efficiency (2, 2, 1)
-An outcome is a pareto improvement if it can make someone better off and no one worse off
-Formally, x is a pareto improvement over y if u(x) > u(y) for at least one individual i, and u(x) ≥ u(y) for all other individuals i’
-An outcome is pareto efficient/optimal if we cannot make a pareto improvement
-Pareto efficiency is the minimum condition to meet before we can label any outcome socially efficient
-When considering whether the allocation of G/S in a competitive market, we either consider pareto optimality or total surplus (utilitarian SWF)
What are consumer and producer surplus, and the pros/cons of them as uses (2,2,2)
-Consumer surplus is the total area under the demand curve from Q = O to Q* - total expenditure
-Producer surplus is total revenue - area under supply curve from Q = 0 to Q* (total producers would pay to use the market (expected profit) vs what they paid)
Positives:
-Conceptually intuitive
-Easy to use/work out
Negatives:
-Doesn’t account for distribution
-Doesn’t distinguish between the extensive and intensive margins
What is the Leibnitz integral rule (3,1)
-When working up total surplus, you add up CS and PS
-However, once you get the integral function, if you differentiate this and rearrange, you get Pd(Q) = Ps(Q)
-This is the Leibnitz integral rule, how if trying to maximise the function, you sub the equilibrium value of Q
-Therefore, equilibrium prices and quantities are both Pareto efficient (can’t move anywhere w/o hurting someone) and maximise total surplus
What are matching markets (2)
-Although allowing prices to bring markets to equilibrium can allocate resources in a socially efficient manner, there are markets (uni) where money can’t do all the work
-Furthermore, sellers in these matching markets care with who they’re matched with (smartest kids for uni), and this economists engage in market design to achieve better allocation
What is one example of a matching problem, and how could it be solved (3,3)
-One example of a matching problem is the house allocation problem, where a set of agents must be allocated to a set of houses (indivisible goods)
-Agents submit a list of ranked preferences (A > B > D > C), with the objective being to find an allocation mechanism which assigns houses to agents
-Desirable properties of the rule are pareto efficiency and strategy roofness (agents have to be honest)
-One important class of allocation mechanism is the ‘random serial dictatorship/random priority mechanism’
-Agents submit their list of ranked preferences, randomly assign each agent a place in the queue, and allow people to choose their top preference one by one
-The result is pareto efficiency and strategy proofing
