Welfare economics

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  • Created by: charlie
  • Created on: 09-05-16 10:55
Aims general
concerns appropriate allocation of resources in an economy/ is there a 'best' allocation? (fair+efficient)
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Aims: efficient
pareto optimal production and allocation given existing factors
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Pareto efficient/optimal allocation
impossible to make one person in society better off without making others worse off
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Aims: equitable
how resources distributed (fair not equal)/ Normative (whats fair changes between people)
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Role of government
altering efficiency/ redistributing (refusing to redistribute) endowments/ VALUE JUDGEMENTS (who should get more) differ
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Efficiency: achieving through value judgement
pareto principle used/ encourage competition+voluntary trades/ ranking allocations need value judgment/ can't work when person A has all X goods + B has all Y goods
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Efficiency: achieving through redistribution policies
free trade benefits consumers + not local producers/ gain to consumers compensate loss to producers
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Efficiency: problems with pareto efficiency
rank on opinion/ pareto efficient=perfectly disgusting/ social judgements override/ individuals want may be wrong/ EGALITARIANISM (all are equal) -ve affects rich/ inadequate if some gain+some lose
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Equity: social welfare functions (SWF)
summary of value judgements (utilities in society)/ society deriving welfare from utility is derived from goods members can consume
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Equity: reasons for aggregation
if all had same preferences= society preferences/ many decisions whose implications experienced collectively/ take actions agreeing with everyones preference
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Equity: Arrow's impossibility theorem
different people have different preferences, impossible to aggregate whole societies preferences
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Equity: Arrow's impossibility theorem 3 axioms (accepted)
1) individuals preferences exist, so should societies 2) everyone prefers X to Y so should society 3) societies preference on X+Y depend on individuals preferences; societies raking is of one individual (DICTATORSHIP)
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Equity: voting 5 axioms
1) completeness (A>B AB B>C then A>C) 3) pareto (all individuals prefer A to B, social ranking of a
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Equity: majority voting
alternatives which have majority chosen/ through voting individuals express ranking
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Equity: 2 problems with majority voting
1) Transitivity (axiom 2) violation: individuals transitive but as collective non transitive (VOTING PARADOX)/ 2) order vote by deciding on 2 allocations first, but which ones to chose?
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SWF vs SIC if gov + society only care about...
1) EFFICIENCY (competitive=non equitable=resources to those who value+make most profit)/ 2) DISTRIBUTION OF RESOURCES (compensate dec efficiency with inc equity=resources to poorest)
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SWF 1: Utilitarian definition
society should max. SUM of utilities of all individual members
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SWF 1: Utilitarian equation
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SWF 1: Utilitarian characteristics
if U1 has lower goods than U2, than increase in U1 for extra good is larger than decrease in U2/ equal, NOT equitable/ IMPERSONAL (same weight to all)
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SWF 1: Utilitarian equation (different members given different weights)
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SWF 2: Rawlsian definition
welfare of society only depends on welfare of worst off individual
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SWF 2: Rawlsian equation
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SWF 2: Rawlsian characteristics
maximise well-being of worst off member/ improving utility of rich doesn't improve social welfare/ NO TRADE-OFF (no inc in better off compensate for loss of worse off)/
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Aims: efficient


pareto optimal production and allocation given existing factors

Card 3


Pareto efficient/optimal allocation


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Card 4


Aims: equitable


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Card 5


Role of government


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