Chương 16 Giới thiệu về kinh tế phúc lợi potx

Pareto efficiency An allocation is Pareto-efficient for a given set of consumer tastes, resources and technology, if it is impossible to move to another allocation which would make s

Chapter 16

Introduction to welfare economics

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,

Welfare economics

 The branch of economics

dealing with normative issues.

 Its purpose is not to describe

how the economy works

 but to assess how well it works.

Equity and efficiency

 Horizontal equity

 Vertical equity

in order to reduce the consequences of their innate differences

Pareto efficiency

 An allocation is Pareto-efficient for a given set of consumer tastes,

resources and technology, if it is

impossible to move to another

allocation which would make some

people better off and nobody worse off.

Perfect competition and Pareto efficiency

 If every market in the economy is a

perfectly competitive free market, the resulting equilibrium throughout the economy will be Pareto-efficient.

 As expressed in Adam Smith’s

notion of the Invisible Hand.

Competitive equilibrium and

Pareto-efficiency

 At any output such as Q 1 *, the last film must yield

consumers P 1 * extra utility.

 The supply curve for the competitive film industry (SS)

is the marginal cost of films.

 Away from P 1 *, Q 1 *, there is a divergence between the

marginal cost and the marginal benefit derived by consumers

 so a move to that position makes society better off.

D

SS

D

Q1*

P1*

Quantity of films

ric e

of fi

lm s

cost of producing a good does not equal

society’s marginal benefit from consuming that good.

distortion over a wide range of markets, rather than concentrating it in one market

Market failure

 … occurs when equilibrium in free

unregulated markets will fail to achieve

an efficient allocation.

 Imperfect competition

 Social priorities (e.g equity)

 Externalities

 Other missing markets

– future goods, risk, information.

 An externality arises whenever an

individual’s production or

consumption decision directly affects the production or consumption of

others…

A production externality

Quantity

ri ce

DD

Suppose DD represents the demand curve for a product (which we may

interpret as marginal

social benefit).

MPC

MPC is the marginal private cost incurred by the firm in producing the good (assumed constant for simplicity).

P

Q

The market clears where MPC=DD at price P and quantity Q.

A production externality

ri ce

DD MPC

MSC

If the firm causes pollution,

it imposes costs on society, presented by marginal

social costs ( MSC ).

So the social optimum is where DD(MSB) = MSC at Q*.

The overall welfare loss to society from the market failure is given by the excess

A consumption externality

DD

MPC, MSC

Quantity

Q

A consumption externality may cause marginal social benefit to diverge from

marginal private benefit.

If MSB>MPB, then the free market equilibrium provides the quantity Q.

MSB

Q'

As compared with the social optimum at Q', where MSB = MSC.

The red area shows the welfare loss.

E.g neighbours may benefit from a well-kept garden.

Greenhouse gases

0 20 40 60 80 100 120

Index (1990 =

100)

Emission of greenhouse gases

1990 1995 2012