WELFARE IN MARKETS
EC 325
London School of Economics
, Motivation
• Our end goal is a deep understanding of when and how governments
should intervene in the economy
• Our first lecture considered individual welfare in isolation
• In the real world, public policies do not affect individuals in isolation,
they affect entire markets
• → we need to understand the welfarist properties of markets.
, Outline of the lecture
1. Models of markets
2. Incidence
3. Efficiency
4. Equity
, Recall from the previous lecture:
We can use the income-substitution effect decomposition to construct wel-
fare measures like EV and CV.
• We can then compare these money metric welfare comparisons across
contexts
• Without income effects, these are equivalent and equal to the change
in consumer surplus
Revealed preference lets us use positive models and empirical analysis to
study normative questions non-paternalistically...but tread carefully!
Social welfare functions let us analyze problems with winners and losers,
but normative judgments are inherent in the choice of SWF.
EC 325
London School of Economics
, Motivation
• Our end goal is a deep understanding of when and how governments
should intervene in the economy
• Our first lecture considered individual welfare in isolation
• In the real world, public policies do not affect individuals in isolation,
they affect entire markets
• → we need to understand the welfarist properties of markets.
, Outline of the lecture
1. Models of markets
2. Incidence
3. Efficiency
4. Equity
, Recall from the previous lecture:
We can use the income-substitution effect decomposition to construct wel-
fare measures like EV and CV.
• We can then compare these money metric welfare comparisons across
contexts
• Without income effects, these are equivalent and equal to the change
in consumer surplus
Revealed preference lets us use positive models and empirical analysis to
study normative questions non-paternalistically...but tread carefully!
Social welfare functions let us analyze problems with winners and losers,
but normative judgments are inherent in the choice of SWF.
