1、CHAPTER 3Tools of Normative AnalysisCopyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.3-2Welfare Economics Welfare Economics branch of economic theory concerned with the social desirability of alternative economic states.3-3Edgeworth BoxAdamEve00srApples per yea
2、rFig leaves per yearvwuyx.3-4Indifference curves in Edgeworth BoxAdamEve00srApples per yearFig leaves per yearA1A2A3E1E3E2.3-5Making Adam better off without Eve becoming worse offAdamEve00srApples per yearFig leaves per yearAgAhApEgghpA Pareto Efficient Allocation.3-6Making Eve better off without Ad
3、am becoming worse offAdamEve00srApples per yearFig leaves per yearAgEggp1pEp1A Pareto Efficient Allocation.3-7Making both Adam and Eve better offAdamEve00srApples per yearFig leaves per yearAgEggp1pEp2Ap2p2 Pareto efficient Pareto improvement.3-8Starting from a different initial pointAdamEve00srAppl
4、es per yearFig leaves per yearAgEggp1pEp2Ap2p2p3p4k.3-9The Contract CurveAdamEve00srApples per yearFig leaves per yearAgEggp1pEp2Ap2p2p3p4The contract curve.3-10Pareto Efficiency in ConsumptionMRSaf = MRSafAdamEve.3-11Production Possibilities CurveApples per yearFig leaves per yearCC0wyxzSlope = mar
5、ginal rate oftransformation.3-12Marginal Rate of Transformation MRTaf = Marginal rate of transformation of apples for fig leaves MRTaf = MCa/MCf.3-13Efficiency Conditions with Variable Production MRTaf = MRSaf = MRSaf MCa/MCf = MRSaf = MRSafAdamEveAdamEve.3-14The First Fundamental Theorem of Welfare
6、 Economics MRSaf = Pa/Pf MRSaf = Pa/Pf MRSaf = MRSaf MCa/MCf = Pa/Pf MRTaf = Pa/Pf Pa/Pf = MCa/MCfAdamEveAdamEve.3-15Efficiency versus EquityAdamEve00srApples per yearFig leaves per yearqp5p3.3-16Utility Possibilities CurveEves utilityAdams utilityUUp3qp5.3-17Social Indifference CurveEves utilityAda
7、ms utilityW = F(UAdam, UEve)Increasingsocialwelfare.3-18Maximizing Social WelfareEves utilityAdams utilityiiiiii.3-19Market Failure Market Power Monopoly Nonexistence of Markets Asymmetric information Externality Public good.3-20Buying 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?.
