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CHAPTER 3

CHAPTER 3. TOOLS OF NORMATIVE ANALYSIS. Welfare Economics. Welfare Economics – branch of economic theory concerned with the social desirability of alternative economic states. y. v. u. w. x. Edgeworth Box. Eve. r. 0’. Fig leaves per year. s. 0. Adam. Apples per year.

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CHAPTER 3

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  1. CHAPTER 3 TOOLS OF NORMATIVE ANALYSIS

  2. Welfare Economics Welfare Economics – branch of economic theory concerned with the social desirability of alternative economic states

  3. y v u w x Edgeworth Box Eve r 0’ Fig leaves per year s 0 Adam Apples per year Edgeworth Box

  4. E1 E2 E3 A3 A2 A1 Indifference curves in Edgeworth Box Eve r 0’ Fig leaves per year s 0 Adam Apples per year Edgeworth Box

  5. Eg Ap Ah Ag Making Adam better off without Eve becoming worse off Eve r 0’ g h A Pareto Efficient Allocation p Fig leaves per year s 0 Adam Apples per year Edgeworth Box

  6. Eg Ep1 Ag Making Eve better off without Adam becoming worse off Eve r 0’ g p Fig leaves per year p1 A Pareto Efficient Allocation s 0 Adam Apples per year Edgeworth Box

  7. Ep2 Eg Ap2 Ag Making both Adam and Even better off Eve r 0’ g • Pareto efficient • Pareto improvement p Fig leaves per year p2 p1 s 0 Adam Apples per year Edgeworth Box

  8. Ep2 Eg Ag Ap2 Starting from a different initial point Eve r 0’ g k p4 p3 p Fig leaves per year p2 p1 s 0 Adam Apples per year Edgeworth Box

  9. Ep2 Eg Ag Ap2 The Contract Curve Eve r 0’ g The contract curve p4 p3 p Fig leaves per year p2 p1 s 0 Adam Apples per year Edgeworth Box

  10. Pareto Efficiency in Consumption MRSaf = MRSaf Eve Adam

  11. Production Possibilities Curve C Fig leaves per year │Slope│ = marginal rate oftransformation w y C 0 x z Apples per year

  12. Marginal Rate of Transformation • MRTaf = Marginal rate of transformation of apples for fig leaves • MRTaf = MCa/MCf

  13. Efficiency Conditions with Variable Production Adam Eve MRTaf = MRSaf = MRSaf MCa/MCf = MRSaf = MRSaf Adam Eve

  14. Efficiency versus Equity Eve r 0’ p3 Fig leaves per year q p5 s 0 Adam Apples per year Edgeworth Box

  15. Utility Possibilities Curve Adam’s utility U p3 p5 q U Eve’sutility

  16. Social Indifference Curve W = F(UAdam,UEve) Adam’s utility Increasingsocialwelfare Eve’sutility

  17. Maximizing Social Welfare i Adam’s utility iii ii Eve’sutility

  18. Market Failure • Market Power • monopoly • Nonexistence of Markets • asymmetric information • externality • public good

  19. Buying into Welfare Economics • Individualistic outlook • merit goods • Results orientation • Coherent framework for analyzing policy • Will it have desirable distributional consequences? • Will it enhance efficiency? • Can it be done at a reasonable cost?

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