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1、Chapter 15Chapter 15 Welfare EconomicsWelfare Economics 1 VILFREDO PARETO 2 ARTHUR CECIL PIGOU 3 OSCAR LANGE 4 KENNETH ARROW 5 JAMES M BUCHANAN 6 AMARTYA SEN Pareto Optimality Evaluation 1 VILFREDO PARETO Pareto Optimality The optimal distribution of goods that is the distribution that will maximize
2、 consumer welfare occurs where Smith and Green each have identical marginal rates of substitution between the two goods We express this symbolically as MRShpS MRShpG 15 1 Optimal distribution of goods At the margin therefore Smith values hamburger relatively more and potatoes relatively less than do
3、es Green The basis for a Pareto improvement is thus established Smith can trade some potatoes to Green and in return receive hamburger As Smith gets more hamburger and Green gets more potatoes Smith s MRShp will fall and Green s MRShp will rise Exchange will end when the marginal rates of substituti
4、on are equal Therefore the Pareto optimal distribution of goods among consumers occurs where the consumers marginal rates of substitution are equal Continue Optimal technical allocation of resources In our two goods two resources example the optimum allocation of resources to productive uses will oc
5、cur where the marginal rates of technical substitution between labor l and capital k in the production of hamburger and potatoes are equal MRTSlkH MRTSlkP 15 2 If these rates differ between the two uses then a Pareto improvement is possible At some point the rearrangement of factor inputs would come
6、 to a halt because diminishing returns in each use would cause the marginal product of the added resource to fall and the marginal product of the deleted resource to rise Once the marginal rates of technical substitution in producing the two goods became equal no further reallocation of resources wo
7、uld help someone without hurting someone else Continue Optimal quantities of output If production and distribution meet the conditions of Pareto optimality then optimum levels of output will be achieved where the marginal rate of substitution of hamburger for potatoes equals the marginal rate of tra
8、nsformation MRT of potatoes for hamburger MRShp MRThp 15 3 At the margin the gains to the consumers will exceed society s opportunity costs Only where the marginal rate of substitution of one product for the other product equals the marginal rate of transformation will there be no further opportunit
9、y to increase one or more person s well being while not reducing someone else s welfare Continue Evaluation Pareto s welfare theory is a significant contribution to economics Of the several criticisms of the Pareto standard four seem particularly germane First some economists argue that it fails to
10、address the important issue of distributive justice or the fair distribution of income in society Instead it simply establishes the efficiency conditions for any existing distribution Second and closely related many public policies that increase national output and overall welfare also redistribute
11、income as a by product of the policy A third objection to the Pareto criteria is that they are based on a static view of efficiency Finally the moral judgments that the Pareto criteria purposely exclude are often legitimate and dominant factors in policy formulation Continue Income Redistribution Di
12、vergence Between Private and Social Costs and Benefits Other Contributions 2 ARTHUR CECIL PIGOU Income Redistribution Basing himself on Jevons and Marshall s principle that the marginal utility of money diminishes as more is acquired Pigou asserted that greater equality of incomes under certain cond
13、itions could increase economic welfare Pigou insisted that interpersonal comparisons of satisfaction can properly be made when dealing with people of the same background raised in the same environment Divergence Between Private and Social Costs and Benefits Pigou s most significant deviation from or
14、thodox theory lay in his focus on the divergence between social and private marginal costs and benefits The private marginal cost of a commodity or service is the expense the producer incurs in making one more unit The social marginal cost is the expense or damage to society as the consequence of pr
15、oducing that unit of product The private marginal benefit of a commodity is measured by the extra satisfaction it provides the buyer Social marginal benefit is the extra satisfaction society gets from the production of the added unit Continue There are opposite cases in which some benefits of privat
16、e actions spill over to society s benefit but for which the person who renders the benefit is not compensated Thus the social marginal net product exceeds the private marginal net product The acts of production and consumption may impose costs or benefits on parties other than the producer and consumer These external costs and benefits or externalities spill over to other parties and are sometimes referred to as spillover effects Continue Figure 15 1 Pigou s Analysis of Externalities Pigou deriv
