welfare economics
4/24/2013
Microeconomics
Introduction to General Equilibrium and Welfare Economics
1
Welfare Economics
• Are market allocations of resources socio-economically efficient? • Welfare Economics: “The branch of economic theory concerned with the social desirability of alternative economic states.”
•
The theory is used to distinguish circumstances under which markets can be expected to perform well
•
It also helps define some circumstances under which we might want government intervention.
2
1
4/24/2013
Welfare Economics
• There are two mainstream approaches to welfare economics:
• Neoclassical approach and
• New welfare economics approach.
• The Neoclassical approach was developed by economists such as
Edgeworth, Sidgwick, Marshall, and Pigou and based on the following assumptions:
• Utility is cardinal, that is, scale-measurable by observation or judgment.
• Preferences are exogenously given and stable.
• Additional consumption provides smaller and smaller increases in utility
(diminishing marginal utility).
• All individuals have interpersonally comparable utility functions.
• With these assumptions, it is possible to construct a social welfare function simply by summing all the individual utility functions.
3
Social Welfare Functions
• Social Welfare functions
• a real-valued function that ranks conceivable economic states from lowest to highest.
• In using welfare measures of persons in the society as inputs, the social welfare function is individualistic in form.
• One use of a social welfare function is to represent prospective patterns of collective choice as to alternative economic states.
• The social welfare function is analogous to the indifferencecurve/budget constraint equilibrium for an individual, except that
• the social welfare function is a mapping of individual preferences or judgments of everyone in the society as to collective choices, which apply to all, whatever individual
Microeconomics
Introduction to General Equilibrium and Welfare Economics
1
Welfare Economics
• Are market allocations of resources socio-economically efficient? • Welfare Economics: “The branch of economic theory concerned with the social desirability of alternative economic states.”
•
The theory is used to distinguish circumstances under which markets can be expected to perform well
•
It also helps define some circumstances under which we might want government intervention.
2
1
4/24/2013
Welfare Economics
• There are two mainstream approaches to welfare economics:
• Neoclassical approach and
• New welfare economics approach.
• The Neoclassical approach was developed by economists such as
Edgeworth, Sidgwick, Marshall, and Pigou and based on the following assumptions:
• Utility is cardinal, that is, scale-measurable by observation or judgment.
• Preferences are exogenously given and stable.
• Additional consumption provides smaller and smaller increases in utility
(diminishing marginal utility).
• All individuals have interpersonally comparable utility functions.
• With these assumptions, it is possible to construct a social welfare function simply by summing all the individual utility functions.
3
Social Welfare Functions
• Social Welfare functions
• a real-valued function that ranks conceivable economic states from lowest to highest.
• In using welfare measures of persons in the society as inputs, the social welfare function is individualistic in form.
• One use of a social welfare function is to represent prospective patterns of collective choice as to alternative economic states.
• The social welfare function is analogous to the indifferencecurve/budget constraint equilibrium for an individual, except that
• the social welfare function is a mapping of individual preferences or judgments of everyone in the society as to collective choices, which apply to all, whatever individual