Public economics wk 3

what are the two main disagreements about efficinecy and equity trade-offs

the nature of the tradeoff, relative value assigned to decrease in equality compared to a decrease in efficiency

what does the utility possibilities curve tell us about pareto efficiency

economy is only pareto efficient if on the UPC

What is the utilitarianism swf

maximise the sum of the utilities of its members

What does utilitarianism swf tell us

the utility of any indiv should be weighted equally to the utility of an other indiv

what does utilitarianism swf show us

a higher concern for inequality implies a curvature of the swf

What is the rawlsianism swf

the welfare of society only depends on the welfare of the worst-off in indiv

What does the rawlsianism swf give

gives l-shaped curves as even if one person is better off it doesn't matter as long as the other person is still the same

What happens when the averson to inequality (e)increases on th social IC

cruve will be more pronounced

If e is -1 which SWF model is it

utilitarianism

If e is infinite to the point they become l-shaped which SWF model is it

rawlisan

CES utility - perfect substitutes

o = infinity, e = 0 (no aversion to inquality, utilitarian)

CES utility perfect complements

o = 0, e = infinity (extreme aversion to inequality, rawlisan

what are the two caveats for CES functions

assume there is a meaningful way to compare indiv's utility, general prefences

what is the compensating variation

the amount of income the consumer has to be compensated for to retain the initial utility level

What is the equivalent variation

the amount of income the consumer would be willing to forgo to avoid the price change

What are the ways you can show EV and CV

indifference curve or compensated demand curve

how to find the measure of EV

tangency between the final level of utility and the orignal prices which is tangent to the original budget constraint

CV function

CV = E(p1x,py,U0) - E(p0x, py, U0) where U0 = V (p0x, py, I)

EV formula

EV = E(p1x, py, U1) - E(p0x, py, U1) where U1 = V(p1x, py, I)

How to calculate social benefits

add up the benefits of all indivs

What does the sum of the social benefits represent

the total willingness to pay

What does the Kaldor-Hicks compensation principle say

if the aggregate willingness to pay exceeds teh cost, the project should be undertaken

What is the issue with the Kaldor-Hicks compensation principle

ignores distributional considerations

what is the excess burden

DWL of taxation

how to measure the indiv welfare loss due to the tax

EV

What is the excess burden

associated with the change in indiv behaviour as a response to the change in realtive process (the substitution effect)f

What are the measures of inequality

poverty index, poverty gap, lorenz curve, gini co-efficient

poverty index def

measures the fraction of the pop whose income lies below the poverty threshold

poverty gap def

measures how much income would need to be given to the ppor to bring them above the poverty threshold

lorenz curve def

the cumulative fraction of the country's total income

If there is high inequality, what does the lorenze curve look like

the gap between the lorenz curve and the 45 degree line of equality gets bigger

gini coefficient formula

double the area between the 45 degree line and the lorenz curve

What is the transfer principle

if you take small income from one person and give it to a rich person, then income inequality increases

transfer principle - what if income and pop changes

no help

Scale independence def

if you double or halve everyone's income and then meausre inequality, it should be the same

translation independence def

if a new distribution is created from the old distribution by shifting it, inequality is the same

population principle def

if a distribution was created by scaling up the pop, then nothing essential for inequality has changed

decomposability def

if inequality should increase in a subgroup, it would increase in the pop as a whole