Welfare Economics. Welfare Economics. Edgeworth box (distribution of two goods between two persons)

Transcription

1 Figue leaf, yealy Welfae Economic PhD. Anto Bajo, Faculty of Economic and Buine, Univeity of Zageb Welfae Economic In ode to be able to adopt a view about deiable govenment activitie, a geneal famewok i equied Mot expet in the aea of public finance ue welfae economic a thi geneal famewok Welfae economic the banch of economic theoy that deal with ocial deiability of altenative economic tate Welfae theoy i ued to ditinguih the cicumtance unde which the maket fail fom thoe in which the maket i ucceful to povide deiable eult. Edgewoth box (ditibution of two good between two peon) y u v w x Apple, yealy 1

2 Fig leave Fig. leave Indiffeence cuve in an Edgewoth box E 1 E 2 E 3 A 3 A 2 Apple A 1 Impovement in ' poition with no deteioation in Eve' E g g h Paeto efficient allocation p A p A h A g Apple Foundation of welfae economic (IV) Paeto efficient allocation if thee i no othe allocation in which ome othe individual i bette off and no individual i woe off Paeto efficiency tandad fo evaluation of the deiability of allocation of eouce Paeto impovement the eallocation of eouce that make one peon bette off without making anyone ele woe off Thee ae numbe of Paeto effective point, and the line between all Paeto effective point i called the contact cuve 2

3 Fig leave p.a. Fig leave The contact cuve the line joining all Paeto efficient point E g E p2 g p p 3 p 4 Contact cuve p 2 p 1 A p2 A g Apple Foundation of welfae economic (VI) In the Paeto efficient point, the cuve of indiffeence pactically touch they ae tangent, thei lope ae the ame The maginal ate of ubtitution i the abolute value of the indiffeence cuve. Thi i the ate at which the individual i willing to exchange one good fo an additional amount of a anothe good. Paeto efficiency equie that the following condition be met: MRS af Eve Foundation of welfae economic (VII) Poduction poibility cuve how the maximum amount of a good that can be poduced with C any et quantity of othe good l Slope l = W Maginal ate of Y tanfomation O x z Apple p.a. The maginal ate of tanfomation the ate at which an economy can tanfom the poduction of a good into the poduction of anothe good. Thi i an abolute value of the lope of the poduction poibilitie cuve = ditance wy/ditance xz = MC a / MC f.l. C 3

4 utility Foundation of welfae economic (VIII) When the upplie of apple and fig leave ae vaiable, the condition fo Paeto efficiency obtain: MRT af. Eve, o MC a / MC f Eve. In uch condition Paeto impovement can be achieved. Baic theoem of welfae economic The baic theoem of welfae economic ay that: A long a poduce and conume wok a pefect competito, i.e., while they accept the pice that ae et, then, with cetain condition, Paeto efficient allocation of eouce and mean appea. maximie hi utility when MRS af = P a / P f. Eve maximie he utility when MRS af = P a / P f. The competitive fim maximie it utility when MC a / MC f = MRT af = P a / P f. Fom thi it deive that MRT af. The ole of Faine (I) Utility poibilitie cuve how the maximum utility of an individual with a given level of utility of anothe individual. It i deived fom the contact cuve. All the point on the utility poibilitie cuve ae Paeto effective but they indicate diffeent ditibution of income between the two individual U Utility poibilitie cuve U O Eve utility The Paeto efficiency citeion of itelf i not enough fo the evaluation of an altenative allocation of eouce and mean. 4

5 utility utility The ole of faine (II) The choice of the bet point on the utility poibilitie cuve deive fom the function of ocial welfae. The function of ocial welfae epeent the view of ociety about the elative deevedne of individual membe of the ociety. Social welfae depend on the utility' of each membe of ociety, o: W = F (U, U Eve ). Inceae ocial welfae i Inceae ocial welfae Social indiffeence cuve ii iii Eve utility Eve utility Role of equity (III) A competitive ytem lead to ome allocation on the elative utilitie cuve, but thi doe not have to be the point that maximie ocial welfae. Govenment intevention, even if the economy ceate Paeto efficient allocation of eouce and mean, may be neceay to achieve efficient ditibution of utility. Govenment activity i alo jutified by the poibility that cetain condition eential fo the woking of the baic theoem of welfae economic do not have to be atified in a eal maket. If they do not exit, the allocation of eouce cannot be efficient. Maket failue The whole economy may be inefficient fo two baic eaon becaue of maket powe o nonexitence of maket. Maket powe if ome individual o fim can affect pice, then allocation will on the whole be inefficient. A fim that ha huge maket powe can aie the pice above the maginal cot and offe fewe poduct than the competition would. The non-exitence of a maket e.g., inuance againt povety. Caue of non-exitence of a maket aymmetical infomation, extenalitie, public good. 5

6 Allocative inefficiency of the maket Cae of maket allocative inefficiency, i.e., a ituation when thee ae no condition fo the achievement of an efficient maket olution: (1) Falling aveage cot, monopoly, othe cae, when pefect competition i ditoted (1) Aymmetical infomation, o high ik (2) Public good (3) The exitence of extenalitie Allocation policy meaue undetaken to change the manne and cale of invetment of economic eouce, paticulaly fo the ake of topping inadequate efficiency.... monopolit behaviou Monopolit that maximie pofit do not attempt to achieve the condition MC=p but MC=MR Paeto efficiency condition ae not met, and monopolit upply a quantity lowe than the optimal. Govenment may affect an inceae in upply By paying unit ubidie in the amount of the diffeence between p and MC By binging in initial aitance to new upplie, to inceae competition By meaue to timulated competition which inceae the chance fo ucce of allocation policy aimed at ceation of pecondition Ditotion of competition In ome cae the meaue of govenment evenue and expenditue policy can bing about ditotion in maket competition and encouage monopolit behaviou. Competition can be ditoted by taxe, tax law, ubidie (epecially to maintain exiting capacitie), tax pivilege o beak (fo given aea, fo R and D), vaiou egulation and edict, and o on (the big fim cope bet with them) and by govenment potectionim. In geneal, becaue of govenment egulation, an economy become moe inflexible and le apt to take ik, and dependent on judgement fom the adminitation. Cot of egulation diect cot of adminitation and implementation of egulation, uncetainty and vacillation in deciion making, cot elated to ent-eeking. 6

7 Aimetical infomation and high ik Incomplete o aymmetically deployed infomation i a caue of maket inefficiencie that come into being when thee ae no inuance maket o when the effect i inadequate. Aymmetical infomation exit when an individual who wihe to ecue himelf fom the damage ceated by the onet of a cetain event ha bette infomation than the inue Rik that the maket cannot inue and ocial ik (inflation, wa, pofound cie), ik of invetment in R&D, big technical poject The achievement of welfae economic Welfae economic ha cetain weaknee- it i founded on an individualit ocial philoophy and i focued on eult and not pocee. Yet, it povide a good famewok of the evaluation of vaiou kind of govenment action. To do with govenment activity, the famewok of welfae economic enfoce thee quetion: Will the action of govenment have deiable conequence to ditibution? Will they encouage efficiency? Can they be caied out with eaonable cot? The vey act of aking thee quetion i a good bai fo the deciion making poce. In hot about welfae economic WE tudie the ocial deiability of altenative economic tate of affai The indicato of the efficient woking of an economy i Paeto efficiency Paeto efficiency i achieved when one peon ha it bette without anothe peon becoming woe off A pecondition fo Paeto efficiency i that fo evey peon MRS=MRT Unde cetain condition, competitive maket lead to Paeto efficiency 7