3-1 Efficiency and equity

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Utility possibilities curve
Social indifference curve
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2.3 Different views on social welfare function
Utilitarianism(Jeremy Bentham) W=UA+UB Rawlsianism(John Rawls) W=Min(UA ,UB ) only the welfare of the worst-off individual matters,no trade-off Egalitarianism: UA(x)=UB(x);XA=XB Eclecticism: Convex to the origin
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Utilitarianism
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Rawlsianism
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Egalitarianism
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Welfare-maximizing point
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Discussion: justice
It should be wrong for some ppl. to kill one innocent person to prevent more others from being killed. Then is it wrong for govt. to transfer income from riches to poors to avoid them suffering to death?
s
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2.1 Equity
Equality: redistribution for equal income Lorenz curve and Gini coefficient Equity Justice
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2.2 Social welfare function
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Production efficiency-Figure
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Production possibility curve
Y
Slope=MRTxy=-Δ Y/Δ X
=MCx/ MCy
Y
Competitive market： MCx / MCy= Px/ Py
o
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X
X
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Condition for exchange efficiency
For every consumer ,the utility level is maximized,given the utility levels of other consumers. The marginal rates of substitution of one commodity for another commodity for all consumers are equal： MRSAXY= MRSBXY = MRSCXY =…… Figure:two good-two person case
B Adam 6apples
Eve 2 apples
1 apple missing during allocation
Eve 5apples
Kaldor improvement Or Pareto improvement
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MRT
MRS
X
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Pareto efficiency for Society
That means total net social benefits for every commodity or service is maximized.
Marginal social benefits equal to marginal social
3-1 Efficiency and equity
2 Criteria for social welfare improvement
Efficiency Equity
1 Economic
efficiency
Law of invisible hand by Adam Smith--- Competition would led the individual in the pursuit of his private interest (profits) to pursue the public interest as if led by an invisible hand.
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1.1 Pareto Optimum
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Pareto Improvement
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Pareto Improvement
A reallocation of resources which makes at least one person better off without making anybody else worse off .
The First Fundamental Theorem of Welfare Economics
Market equilibrium
The Second Fundamental Theorem of Welfare Economics
Pareto efficiency
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Exchange efficiency-Figure
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Condition for product mix efficiency
An efficiently produced mix of products maximizes the Y utilities of consumers. Marginal rate of transformation in production is equal to marginal rate of substitution in consumption for every two products： MRSXY= MRTXY=PX/PY
Utility possibilities curve: summary of efficiency Embody society’s views on the relative deservedness of its members. W=F（U1，U2，U3，……Un） social welfare is some function of each individual’s utility. Social indifference curve
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1.2 Condition for production efficiency
For every product,the output is maximized,given the outputs of other products. The marginal rates of technological substitution of one factor for another factor employed in the production of all products are equal： MRTSXLK= MRTSYLK = MRTSZLK =…… Figure: two factor-two good case
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2.4 Tradeoff between equity and efficiency
公平
A f2
f1
O
e1
e2
B
效率
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A case of reallocation
A Adam 10apples
redistribution
costs for every commodity or service. MSB=MSC=P
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2 Efficiency versus Equity
r
Fig leaves per year
Eve
0’
p3
p5
q
0 Adam
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q or P5, which is better? You need to use Social Welfare Function Apples per year W= (U1,U2, U3…,Un) 《财政学》倪秋菊主讲
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“Pareto Optimum” is equivalent to “efficiency” in economics. An allocation of resources at which the only way to make one person better off is to make somebody else worse off. Named after Italian economist Vilfredo Pareto(1848—1923) 。