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Introduction to welfare economics

Introduction to welfare economics. JOIN KHALID AZIZ. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870

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Introduction to welfare economics

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  1. Introduction to welfare economics

  2. JOIN KHALID AZIZ • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. • CONTACT: • 0322-3385752 • 0312-2302870 • 0300-2540827 • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

  3. JOIN KHALID AZIZ • FRESH CLASSES OF MA ECONOMICS EXTERNAL KU JUST AFTER ANNOUNCEMENT OF RESULT

  4. JOIN KHALID AZIZ • FRESH CLASSES • ICMAP STAGE 1,2 & 3 • FUNDAMENTALS OF FA,COST ACCOUNTING ,APPRAISAL & FA • INDIVIDUAL & GROUPS

  5. Welfare economics • The branch of economics dealing with normative issues. • Its purpose is not to describe how the economy works • but to assess how well it works.

  6. Equity and efficiency • Horizontal equity • the identical treatment of identical people • Vertical equity • the different treatment of different people in order to reduce the consequences of their innate differences

  7. Pareto efficiency • An allocation is Pareto-efficient for a given set of consumer tastes, resources and technology, if it is impossible to move to another allocation which would make some people better off and nobody worse off.

  8. Perfect competition and Pareto efficiency • If every market in the economy is a perfectly competitive free market, the resulting equilibrium throughout the economy will be Pareto-efficient. • As expressed in Adam Smith’s notion of the Invisible Hand.

  9. Competitive equilibrium and Pareto-efficiency • At any output such as Q1*, the last film must yield consumers P1* extra utility. • The supply curve for the competitive film industry (SS) is the marginal cost of films. • Away from P1*, Q1*, there is a divergence between the marginal cost and the marginal benefit derived by consumers • so a move to that position makes society better off. D SS Price of films P1* D Q1* Quantity of films

  10. Distortions • A distortion exists whenever society’s marginal cost of producing a good does not equal society’s marginal benefit from consuming that good. • Some such distortions may be inevitable • and it may be more efficient to spread such distortion over a wide range of markets, rather than concentrating it in one market • this results from the theory of the second-best

  11. Market failure • … occurs when equilibrium in free unregulated markets will fail to achieve an efficient allocation. • Imperfect competition • Social priorities (e.g. equity) • Externalities • Other missing markets • future goods, risk, information.

  12. Externalities • An externality arises whenever an individual’s production or consumption decision directly affects the production or consumption of others… • other than through market prices • e.g. a chemical firm discharges waste into a lake & ruins the fishing for anglers

  13. Suppose DD represents the demand curve for a product (which we may interpret as marginal social benefit). MPC is the marginal private cost incurred by the firm in producing the good (assumed constant for simplicity). P MPC DD The market clears where MPC=DD at price P and quantity Q. Q A production externality Price Quantity

  14. If the firm causes pollution, it imposes costs on society, presented by marginal social costs (MSC). MSC Price So the social optimum is where DD(MSB)=MSC at Q*. The overall welfare loss to society from the market failure is given by the excess of MSC over MPC between Q* and Q. MPC DD (MSB) Q* Q Quantity A production externality

  15. MPC, MSC Price MSB As compared with the social optimum at Q', where MSB = MSC. DD The red area shows the welfare loss. Q Q' Quantity A consumption externality E.g. neighbours may benefit from a well-kept garden. A consumption externality may cause marginal social benefit to diverge from marginal private benefit. If MSB>MPB, then the free market equilibrium provides the quantity Q.

  16. Greenhouse gases

  17. JOIN KHALID AZIZ • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. • CONTACT: • 0322-3385752 • 0312-2302870 • 0300-2540827 • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

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