welfare, tax, price controls Flashcards
What is a pareto improvement
An outcome π₯ is a Pareto improvement over an alternative outcome π¦
if it makes someone better off and no-one worse off.
What is meant by pareto efficient
An outcome π₯ is Pareto efficient if we cannot make a Pareto
improvement. (ie. if we move to any other points, someone is worse off so no pareto improvement can be made)
What are pareto inefficient points?
Pareto inefficient points are undesirable for everyone
ο· (we can improve the utility of all parties by moving elsewhere
note that pareto optimal is another term for pareto efficient with the same meaning
What is parento efficiency a minimum condition
Pareto efficiency is the minimum condition to meet before we can label any outcome as socially efficient or socially optimal.
What is consumer surplus
Defined as total area under the demand curve from π = 0 to π = πβ minus their
total expenditure πβπβ
Interpretation: Total amount that consumers would pay to use this market.
What is producer surplus
Defined as total revenue πβπβ
minus area below the supply curve from π = 0 to π = πβ
(total cost).
Similar interpretation:
Total amount that producers would pay to access the market.
(i.e. total expected profit)
pros and cons of consumer/producer surplus
- Each consumer or producer has the same weight in this function.
- Does not distinguish between changes along intensive and extensive margin.
- Despite such criticisms, the measure is still widely use because:
1. It is conceptually intuitive
2. It is easy to use
Describe pareto efficiency of the market equilibrium
- equilibrium in a competitive market is pareto efficient
- but is not the only pareto efficient outcome e.g if you sold a good for free, thats also pareto efficient as charging any other price must be a higher price and that reduce CS from max CS to a smaller CS so consumer consumer worse off by any chnages
Rfer to lecture 6 leibnitz integral rule to prove why equilibirum gives the max cs and ps
sssss
to maximise social welfare we want to maximise total surplus so CS+PS and to do thus we can find the equation for area of total surplus and differentiate this wrt q , equate to 0 and solve to find what value of Q maximises surplus. P is irrelevant as it onyl changes hwo the surplus is distributed between consumers and producers
Describe efficiency of market equilibrium
equilibrum prices and quantities are
+ pareto efficient
+ also maximise total surplus
The random serial dictatorship class of allocation mechnism
Step 1: Have agents submit their ranked list of preferences
Step 2: Randomly assign each agent a place in a βvirtual queueβ
Step 3: 1st place agent in the queue gets their first choice
Step 4: 2nd place agent in the queue gets their top choice of remaining houses
β¦
Step N: Last place agent in the queue gets their top choice of remaining houses
What is the result of the random serial dictattoship mechanism
(aka random priority mechanism)
: This simple mechanism is Pareto efficient and Strategy-proof
What are matching markets
In addition, sellers in such matching markets often care who they are matched
with.
so:
ο· Agents submit ranked list of preferences (e.g. πΆ β» π· β» π΄ β» π΅)
ο· Objective: Find an allocation mechanism (rule) which assigns houses to agents.
