Micro Easter Essay
“If an economy is at a general competitive equilibrium, we may conclude that social welfare is being maximized.” Access this statement and explain why you think it is right or wrong.
This essay will commence by defining the criteria for social welfare maximization. It will then discuss the relationship between competitive market and Pareto efficient before explaining the implication from the first and the second welfare theorem. It will then talk about equity issue arise from the topic and social welfare functions. Finally, the essay will conclude that being at a competitive equilibrium does not equal to social welfare maximization.
Efficient, Equity and Social Optimum
To start with, there are two conditions to maximize a society’s welfare--- efficiency and equity. First and foremost, optimal allocation of resources must be efficient, which is Pareto efficient. It describes an allocation of good and services such that any relocation harms at least one person. However, it should be noted that efficiency is only a necessary condition for social welfare maximization. In order to achieve social optimum, the final distribution of goods and services must be equitable. In the form of competitive market, it also requires the initial allocation of goods and services to be equitable. Thus, any Pareto-efficient allocation can be reached as a competitive equilibrium if the initial endowment is appropriate.
Perfectly competitive market
To achieve overall efficiency requires efficiency in the interface of production and exchange. In a competitive market with the absence of externality, each market participants are price taker. Hence, they will choose a bundle such that the marginal rate of substitution equal to the price ratio of goods. Moreover, because all the consumers face the same price under perfect competition market, they will have the same marginal rates of substitution. Thus, the competitive equilibrium achieves consumption efficiency: no further mutual
This essay will commence by defining the criteria for social welfare maximization. It will then discuss the relationship between competitive market and Pareto efficient before explaining the implication from the first and the second welfare theorem. It will then talk about equity issue arise from the topic and social welfare functions. Finally, the essay will conclude that being at a competitive equilibrium does not equal to social welfare maximization.
Efficient, Equity and Social Optimum
To start with, there are two conditions to maximize a society’s welfare--- efficiency and equity. First and foremost, optimal allocation of resources must be efficient, which is Pareto efficient. It describes an allocation of good and services such that any relocation harms at least one person. However, it should be noted that efficiency is only a necessary condition for social welfare maximization. In order to achieve social optimum, the final distribution of goods and services must be equitable. In the form of competitive market, it also requires the initial allocation of goods and services to be equitable. Thus, any Pareto-efficient allocation can be reached as a competitive equilibrium if the initial endowment is appropriate.
Perfectly competitive market
To achieve overall efficiency requires efficiency in the interface of production and exchange. In a competitive market with the absence of externality, each market participants are price taker. Hence, they will choose a bundle such that the marginal rate of substitution equal to the price ratio of goods. Moreover, because all the consumers face the same price under perfect competition market, they will have the same marginal rates of substitution. Thus, the competitive equilibrium achieves consumption efficiency: no further mutual