Public economics wk2

Pareto efficiency

a resource allocation that means no one can be made better off without someone being made worse off

pareto efficiency and individualism

not concernd with resdistribution and each indiv's perception of their welfare counts (merit goods)

what is a contract curve

a line connecting all pareto efficient points

what does pareto efficiency require

MRS must be equal for all consumers

the absolute value of the slope is

MRS

Def of MRTS

what the producer is willing to trade one unit of input for an additional unit of another input

What is the slop of the production possibilities curve

Marginal rate of transformation

What is the MRT formula

MCa/MCf

What is the efficiency condition

MRT = MRSa = MRSb

What is the first fundamental theorem of welfare economics

a pareto efficient allocation of resources exists

what is the utility maxoimisation formula

MRSa = MRSb = Pa/Pf

What is the cost minimisation formula for businesses

MRTS = w/r

What is the second fundamental theorem of welfare economics

the criterion of pareto effiency is not enough to rank alternative allocations of resources

What is the utility possibilities cruve

traces the max level of utility that can be achieved by two consumers

What is a social welfare function

how society's wellbeing relates to the wellbeing of its members which creates a set of social IC

how to maximise social welfare

have the utility curve tangent to the highest IC

What are the implications of the second welfare theorem

efficiency and distributional fairness can be separated, if soceity determeines that the current distribution of resources is unfair then they do not need to interfer with the markets but transfer resources among people in a way deemed unfair

Exchange efficiency def

whatever goods are produced have to go to the indiv who them the most

production efficency def

the production of one good cannot be increased without decreasing the production of another

product mix efficiency

the goods produced should correspond to those desired by indivs

product mix efficiency formula

MRT = MRS

What is the reason for imperfect competititon

increasing returns to scale, imperfect info, strategic behaviour to discourage competition, government actions

reasons for incomplete markets

innovation transaction costs, asymmetry of info, enforcement costs

Merit goods def

indivs may not act in their best interests and therefore their perception of their own welfare may be an unreliable source

Compensating variation def

amount of income the person has to be compensated to retain the inital utility level

Equivalent variation def

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

CV formula

E(p1x, py, U0) - E(p0x, py, U0)

EV formula

E(p1x, py, U1) - E(p0x, py, U1)

What do we assume when thee is a change in the compensated demand curve

if the price of one good changes first then the compensated demand curve for the other good shifts outwards