Summary EC1002 Introduction to Economics - Part 3: Welfare Economics

INTRODUCTION TO
ECONOMICS
- Part 3: Welfare Economics -




Good luck studying!


short manual:
- includes a graph
- includes a schema/diagram
- includes an introduction
- includes additional information that
is not in the main textbook updated: 30/12/2017

, CONTENTS
CHAPTER 13: WELFARE ECONOMICS
13.1. Equity and efficiency ………………………………….……………………………….. 1
13.2. Efficiency - let’s learn this! ………………………………….………………………. 2
13.3. First and second theorems of welfare economics ……………………….. 3
13.4. The Edgeworth box ………………………………….………………………………….. 4
13.5. Distortionary taxation ………………………………….……………………………… 5
13.6. Market failure ………………………………….…………………………………………. 6
13.7. Externalities
13.7.1. Production and consumption externalities ……………………. 7
13.7.2. Property rights and Couse theorem ………………………………. 8
13.8. Environmental issues ………………………………….………………………………. 9
13.9. The economics of climate change ……………………………………………….. 10
13.10. Forward and contingent markets ………………………………………………… 11
13.11. Quality, health and safety ………………………………….………………………… 12

CHAPTER 14: GOVERNMENT SPENDING AND REVENUE
14.0. Introduction to government spending and taxation ……………………. 13
14.1. Government spending and taxation ……………………………………………. 14
14.2. Government in the market economy ………………………………………….. 15
14.3. Types of income distribution and Gini coefficient ……………………….. 17
14.4. The principles of taxation ………………………………….………………………… 18
14.5. Pigouvian tax and subsidy ………………………………….………………………… 19
14.6. Supply-side economics ………………………………….…………………………….. 20

, 13.1. Equity and efficiency


WHAT IS WELFARE ECONOMICS?
• it deals with normative issues and assesses how well the economy works
o ALLOCATIVE EFFICIENCY  getting the most out of scarce resources
o EQUITY  how fair is the distribution of resources among members of society

EQUITY EFFICIENCY
• HORIZONTAL EQUITY • RESOURCE ALLOCATION
o identical treatment of identical people o complete description of who does
o most people agree about this what and who gets what
o depends on:
• VERTICAL EQUITY  technology
o different treatment of different people  resources
in order to reduce the differences  consumer tastes
o people disagree about this
• PARETO OPTIMALITY
o allocation of resources is Pareto
efficient if any reallocation would
make at least 1 person worse off
o PARETO GAIN  reallocation of
resources that makes at least 1 person
better off with no person worse off

The Pareto-efficient frontier

Pareto
Pareto gaingain




any point inside - Pareto-inefficient
A - Pareto-inefficient if we can move to B any point on the frontier - Pareto-efficient
(which society chooses depends on relative values of utility)
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