Welfare and Efficiency W2 P2 Efficiency

Hausman, et. al - welfare economics

voluntary trade makes both parties better off if individuals choose in alignment with their preferences, might advocate for limited government intervention in markets

Welfarism

goodness is dependent on the set of individual utilities and can be seen as an increasing function of that set

Paretian welfare economics - based on pareto

can make normative recommendations using minimal value judgements, pareto improvement - good, pareto inefficiency - bad, cannot compare points that are all improvements

Pareto improvements and benevolence - problems

sometimes have uncertainty about policy outcome, trade may have unintended externalties, cash payment may be more pareto efficient than subsidies, may lead to exploitative transactions

First welfare theorem

the allocation resulting from any perfectly competative equilibrium is pareto efficient

Second welfare theorem

pareto optimal outcome can be reached by altering the initial allocation of resources and then allowing voluntary exchange, critiques are not of the theory but of the starting position

Cost of unanimity

all uniform policies harm someone, could be giving up large benefit for the many to avoid small harms to the few, e.g. taking riches wealth to feed the poor

Kaldor-Hick efficiency

Efficiency of a policy is measured by its potential to be a pareto improvement via compensation, if amount winners are willing to pay exceeds amount losers need to be compensated

Kaldor-kicks efficiency objections

only considers ‘revealed preferences from market chocies, does not necessarily ‘grow the pie’, relies on willingness to pay, does not address justice and fairness

The original position

unfair to normally evaluate outcomes in terms of efficiency if the original position is unfair - cannot be reduced to welfare