Consumer, Producer Theory and Welfare

• [CT Assumption] Completeness - people know how to rank any two bundles and decide if they prefer one because they get higher utility

  
  

  [Limitation] People may not be able to rank two bundles as they don’t know how much utility they will receive from one or both of them
• [CT Assumption] Transitivity - if a person prefers bundle A to bundle B and prefers bundle B to bundle C, it can be assumed that they will prefer bundle A to bundle C

  
  

  [Limitation] People’s preferences may be context -dependent
• [CT Assumption] Continuity - if a person prefers bundle A to bundle B, and bundle C is close to bundle B, they will prefer bundle A to bundle C

  
  

  [Limitation] It's difficult to discern tiny differences
• [CT Assumption] Non-satiation - consuming more of something that brings utility is always better

  
  

  [Limitation] Ignores diminishing marginal utility
• [CT Assumption] Convexity - people prefer average bundles to extreme ones (the preferred set of bundles is convex)

  
  

  [Limitation] The opposite can be true
• Pareto Principle - if after a policy no one is worse off and at least one person is better off, it should go ahead
• Utilitarian SWF - the utility of everyone in society is summed up and if this sum is increased after a policy, it should be implemented
• Rawlsian/Maximin SWF - a policy is desirable if it improves the state of the worst off in society
• Inequality-Averse SWF - a policy that reduces inequality is preferred to one that increases it
• If there is a possible Pareto improvement, the agent is currently Pareto inefficient