Tools of Normative Analysis参考.ppt

For example if MRSAdamaf is 1/3, which means Adam is willing to trade 3 apples for 1 fig leaf when changing his consumption; and MRTaf is 2/3, which means the economy can produce 2 more fig leaves by reducing production of apples by 3. In this case, Adam can surely increase his utility level of fig leaves from 1 to 2 without compromising Eve’s benefits. Therefore, only when MRTaf = MRSAdamaf = 2/3, Pareto improvement is stopped and Pareto efficient is reached. Same process works for Eve’s MRS. The First Fundamental Theorem of Welfare Economics ? conditions ? 1)?All producers and consumers act as perfect competitors, no one can influence the market. 2)?A market exists for each and every commodity? The First Fundamental Theorem of Welfare Economics The first fundamental theorem of welfare economics states that a Pareto-efficient allocation of resources emerges. Adam Smith’s “Invisible Hand” This mean a competitive economy allocates resources efficiently without any need for centralized direction. Implications Pareto efficiency emerges in a competitive economy. It requires that prices be in the same ratios as marginal costs, and competition guarantees this condition is met. Efficiency also requires that the additional cost of each commodity be reflected in its price. The Second Fundamental Theorem Of Welfare Economics But the government doesn’t have to intervene with the markets. The Second Fundamental Theorem Of Welfare Economics The society can attain any Pareto efficient allocation of resources by making a suitable assignment of initial endowments (redistributing income) and then letting the markets work. ? * * * Box and dimensions initially set 1st click – place point v 2nd click – draw horizontal line uw 3rd click – draw vertical line xy * Box and dimensions initially set 1st click – Adam’s indifference curves 2nd click – Eve’s indifference curves * Box and dimensions initially set 1st click – “A Pareto efficient allocation” and arrow * Box and d