Chap03 Tools of Normative Analysis(西方财政学-厦门大学,曾建华).pptVIP

Evaluating policy Will the policy have desirable distributional consequences? Will it enhance efficiency? Can it be done at a reasonable cost? Recap of Tools of Normative Analysis What is welfare economics Pure exchange economy Production economy First and second fundamental welfare theorems * * Chapter 3 - Tools of Normative Analysis Public Economics Welfare economics Need systematic framework to assess the desirability of various government actions. Welfare economics is concerned with the social desirability of alternative economic states. Distinguishes cases when private markets work well from cases where government intervention may be warranted. Relies heavily on basic microeconomic tools, particularly indifference curves. Pure exchange economy Economy with 2 people (Adam Eve) 2 commodities (Apples Figs) Fixed supply of commodities (e.g., on a desert island) An Edgeworth Box depicts the distribution of goods between the two people. Figure 3.1 Pure exchange economy Each point in the box in Figure 3.1 represents an allocation between Adam and Eve. Each point in the box fully exhausts the resources on the island. Adam consumes what Eve doesn’t. Adam’s consumption of apples and figs increases as we move toward the northeast in the box. Eve’s consumption of apples and figs increases as we move toward the southwest in the box. At point v in the figure, Adam’s allocation of apples is Ox, and of figs is Ou. Eve consumes O’v of apples, and O’w of figs. Pure exchange economy Similarly, Eve’s happiness increases as she consumes more; therefore her utility is higher for bundles toward the southwest in the Edgeworth Box. Eve’s indifference curves therefore are “flipped around.” Her utility is higher on E3 compared E2 or E1. Figure 3.2 Pure exchange economy Suppose some arbitrary point in the Edgeworth Box is selected, for example point g in Figure 3.3. This provides an initial allocation of goods to Adam and Eve, and thus some initial level of utility. Figure 3.3 Pu