Welfare economics Flashcards
What is a social welfare function
Individual preferences that have been put into a complete, transitive and continuous social welfare ordering may become a social welfare ordering.
What does a Pareto SWF require?
Ordinal rankings (an incomplete SWF)
What does a Rawlsian SWF require?
Comparability
What does a Utilitarian SWF require?
Ordinal rankings and comparability
The pareto criterion
A social outome x is preffered to y if ther eis at least one person whom in x is strictly better off, and no person whom in x is strictly worse of than in y
Pareto efficiency
An outcome is PE if there are no feasible alternatives that fulfil the pareto criterion.
Proof that at PE allocation MRS are equal
When all maximising, firms making zero profits and households spending all endowment the result holds
1st theorem of welfare economics
General competitive equlibrium is pareto efficient
- The requirements for GCE are fulfilled in the proof for PE.
- All agents optomise such that MRS and MRT are equal to relative prices in GCE (any other choice would be non-optimal)
- All agents face the same set of prices hence equal
Contract curve
Set of pareto efficient allocations in an edgeworth box
Offer curves
Trace the tangency of consumer’s indifference curves with different price lines
Where the offer curves intersect will be equlibrium (both tangent to same price line. Will be on offer curve)
2nd theorem of welfare economics
- Assume that production sets and preferences are convex
- There exists a price vector p>0 such that any GCE allocation is PE.
What the 2nd theorem does not say
- Any PE allocation can be achieved as GCE with appropriate initial endowments (via lump sum tax)
Arrow’s Impossibility Theorem (1951)
Impossible to have a complete, transitive ordering that upholds
- Unrestricted domain
- Pareto criteria
- Irrelevance of alternatives
- non Dictatorship
