Fundamentals of Welfare Economics

• What is a pareto efficient allocation?

  An allocation in which no one can be made better off without making someone else worse off
• What is a pareto improvement allocation

  An allocation in which at least one person is made better off without making someone else worse off
• What is a contract curve

  A locus of all the pareto efficient points, starting and ending at the origin points
• What is optimality represented as in a pure exchange economy?

  The MRS's equate to each other
• What is optimality represented as in a production economy?

  MRT=MRS
• What are the conditions for the first welfare theorem of welfare economics?

  -A market for every commodity

  -No externalities

  -No public goods

  -No assymetric information

  -Producers and consumers are price takers (perfect competition)asymmetric
• What is the first fundamental theory of welfare economics?

  A competitive economy automatically allocates resources efficiently without need for centralized direction
• What is the second fundamental theory of welfare economics?

  A society can attain a pareto efficient allocation with redistribution of initial allocation of resources and letting people trade freely
• A suitable transfer of endowments refers to a lump sum transfer? What is a lump sum transfer


  A transfer of initial endowments that has nothing to do with the choices you've made
• What is the social indifference curve?

  Society's willingness to trade one person's utility for another
• True/False: Every point on the utility possibilities curve is pareto efficient

  True
• What does it mean when the social welfare curve is more concave?

  Society is more inequality averse
• What is marginal social utility?

  Change in social welfare from increasing a person's utility by a small amount
• What social welfare function is the least inequality averse?

  Utilitarian
• What social welfare function is the most inequality averse?

  Rawlsian