Download Welfare Economics - Economics of Environmental Resources - Lecture Slides and more Slides Environmental Economics in PDF only on Docsity! 1 ENVIRONMENTAL ECONOMICS AEC 829 -SEPT 17, 2003 2 III.WELFARE ECONOMICS A. What is welfare economics? B. What is an efficient allocation of resources? C. What assumptions underlay the concept of efficiency? D. What relationship is there between efficiency and perfect markets? E. What is the relationship between property rights, externalities and transactions costs? AEC 829 -SEPT 17, 2003 3 WELFARE ECONOMICS Is that branch of study which endeavors to formulate propositions by which we rank alternative economic situations open to society on a scale of better or worse Docsity.com 2 AEC 829 -SEPT 17, 2003 4 WELFARE ECONOMICS “a glorious failure” AEC 829 -SEPT 17, 2003 5 THE CONCLUSIONS OF THIS SECTION Efficiency means that all gains from trade have been exhausted There is no such thing as a unique efficient solution “Efficient allocation” does not mean good or best. Society can prefer an inefficient allocation to an efficient allocation. There is no value-free way of determining the correct or best allocation of resources. There are institutional arrangements that guarantee an efficient allocation of resources. AEC 829 -SEPT 17, 2003 6 WELFARE ECONOMICS: A REVIEW Economic coordination Economy is a system for organizing production of goods and services and their distribution among people, i.e. allocation of scarce resources among possible alternative uses Co-ordination of production, consumption, saving and investment decisions, given resource scarcity, technology, needs and desires of citizens, and the system of rights. Docsity.com 5 AEC 829 -SEPT 17, 2003 13 Simple Economy Consider an economy consisting of 2 people, Sam(A) and Oscar (B), two goods Wool (X) and Wheat (Y), and two inputs Land ( K) and and Labor (L) each of which is available in a fixed quantity (resource constraint) Production function X = X (Kx, Lx) Y = X (KY, LY) (eq 5.2) Utility functions UA = UA (XA, YA) UB = UB (XB, YB) (eq 5.1) AEC 829 -SEPT 17, 2003 14 Efficiency and Markets First Theorem of Welfare Economics In a competitive economy, a market equilibrium is Pareto efficient Second Theorem of Welfare Economics In a competitive economy, any Pareto optimum can be achieved by market forces, provided the resources of the economy are appropriately distributed before the market is allowed to operate AEC 829 -SEPT 17, 2003 15 Adam Smith’s Invisible Hand Each individual judging his or her own welfare means that social welfare will be maximized. That is, there is a set of prices that will emerge assuming a given income distribution that will lead to the maximum of social welfare. Docsity.com 6 AEC 829 -SEPT 17, 2003 16 Social Welfare Function and Optimality Efficient allocation is not unique Social welfare is measured as a function of individual utilities (utilitarianism) SWF W= W(UA, UB) Alternative forms of SWF W = UA + UB W = φ1UA + φ2UB φ is some weighting factor W = min {UA, UB} maximally benefit the poor AEC 829 -SEPT 17, 2003 17 Economic Decisions Kaldor-Hicks Principle Theory of the Second Best Docsity.com
