In this chapter, the following content will be discussed: Welfare economics is the study of the desirability of different economic states; first fundamental theory of welfare economics: competitive markets result in pareto efficiency; second fundamental theory of welfare economics: society can attain any pareto efficient outcome with reassignment of initial endowments and free trade. | TOOLS OF NORMATIVE ANALYSIS Chapter 3 Welfare Economics Concerned with the social desirability of alternative economic states. 3- Consumption Economy Edgeworth Box - an analytical device used to model welfare economic theory Depicts distribution of goods in a 2-good/2-person economy Pareto Efficiency – an allocation of resources such that no person can be made better off without making another person worse off Pareto Improvement – a reallocation of resources that makes at least one person better off without making anyone else worse off 3- Edgeworth Box 2 person / 2 good economy Adam Eve 0 0’ s r Apples per year Fig leaves per year v w u y x At “v”, how many apples and figs do Adam and Eve consume? 3- Box and dimensions initially set 1st click – place point v 2nd click – draw horizontal line uw 3rd click – draw vertical line xy Indifference curves in Edgeworth Box Adam Eve 0 0’ s r Apples per year Fig leaves per year A1 A2 A3 E1 E3 E2 3- Box and . | TOOLS OF NORMATIVE ANALYSIS Chapter 3 Welfare Economics Concerned with the social desirability of alternative economic states. 3- Consumption Economy Edgeworth Box - an analytical device used to model welfare economic theory Depicts distribution of goods in a 2-good/2-person economy Pareto Efficiency – an allocation of resources such that no person can be made better off without making another person worse off Pareto Improvement – a reallocation of resources that makes at least one person better off without making anyone else worse off 3- Edgeworth Box 2 person / 2 good economy Adam Eve 0 0’ s r Apples per year Fig leaves per year v w u y x At “v”, how many apples and figs do Adam and Eve consume? 3- Box and dimensions initially set 1st click – place point v 2nd click – draw horizontal line uw 3rd click – draw vertical line xy Indifference curves in Edgeworth Box Adam Eve 0 0’ s r Apples per year Fig leaves per year A1 A2 A3 E1 E3 E2 3- Box and dimensions initially set 1st click – Adam’s indifference curves 2nd click – Eve’s indifference curves Beginning at Point g, how to make Adam better off without Eve becoming worse off Adam Eve 0 0’ s r Apples per year Fig leaves per year Ag Ah Ap Eg g h p A Pareto Efficient Allocation 3- Box and dimensions initially set 1st click – “A Pareto efficient allocation” and arrow Beginning at Point g, how to make Eve better off without Adam becoming worse off Adam Eve 0 0’ s r Apples per year Fig leaves per year Ag Eg g p1 p Ep1 A Pareto Efficient Allocation 3- Box and dimensions initially set 1st click – “A Pareto efficient allocation” and arrow Beginning at Point g how to make both Adam and Eve better off Adam Eve 0 0’ s r Apples per year Fig leaves per year Ag Eg g p1 p Ep2 Ap2 p2 Pareto efficient Pareto improvement 3- Box and dimensions initially set 1st click – Box with Pareto efficient and improvement within Starting from a different initial point: Point k Adam Eve 0 0’ s
