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What is the primary goal of welfare economics?
What is the primary goal of welfare economics?
Maximizing social welfare
Which of the following are considered objectives of welfare economics? (Select all that apply)
Which of the following are considered objectives of welfare economics? (Select all that apply)
Utilitarian social welfare functions sum the utilities of all individuals in society.
Utilitarian social welfare functions sum the utilities of all individuals in society.
True
The Rawlsian social welfare function maximizes the utility of the worst-off individual in society.
The Rawlsian social welfare function maximizes the utility of the worst-off individual in society.
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A situation is Pareto efficient if it is impossible to make one person better off without making at least one other person worse off.
A situation is Pareto efficient if it is impossible to make one person better off without making at least one other person worse off.
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Which of the following is NOT a type of market failure discussed?
Which of the following is NOT a type of market failure discussed?
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Deadweight loss results from a market that is not in equilibrium.
Deadweight loss results from a market that is not in equilibrium.
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Which of the following is NOT a consequence of market failures on social welfare?
Which of the following is NOT a consequence of market failures on social welfare?
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Consumer Surplus measures the difference between what consumers are willing to pay for a good/service and what they actually pay.
Consumer Surplus measures the difference between what consumers are willing to pay for a good/service and what they actually pay.
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Producer Surplus measures the difference between the minimum price producers are willing to accept for a good/service and what they receive.
Producer Surplus measures the difference between the minimum price producers are willing to accept for a good/service and what they receive.
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What is the difference between consumer surplus and producer surplus?
What is the difference between consumer surplus and producer surplus?
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Define Deadweight Loss?
Define Deadweight Loss?
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The Hicks-Kaldor criterion states that a change is considered efficient if it can compensate those who are harmed by a change in a way that leaves those who benefit better off than before.
The Hicks-Kaldor criterion states that a change is considered efficient if it can compensate those who are harmed by a change in a way that leaves those who benefit better off than before.
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The Free-Rider problem arises because of the non-excludability characteristic of public goods.
The Free-Rider problem arises because of the non-excludability characteristic of public goods.
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Positive externalities lead to overproduction of goods and services because the market does not fully capture the benefits.
Positive externalities lead to overproduction of goods and services because the market does not fully capture the benefits.
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Negative externalities lead to overproduction of goods and services because the market does not fully account for the costs.
Negative externalities lead to overproduction of goods and services because the market does not fully account for the costs.
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Cap-and-trade systems provide a limit on the total amount of pollution that can be emitted, and allow firms to trade pollution permits.
Cap-and-trade systems provide a limit on the total amount of pollution that can be emitted, and allow firms to trade pollution permits.
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The tragedy of the commons occurs when individuals overuse a shared resource, leading to its depletion.
The tragedy of the commons occurs when individuals overuse a shared resource, leading to its depletion.
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Equity refers to the fair distribution of resources and opportunities among individuals in society.
Equity refers to the fair distribution of resources and opportunities among individuals in society.
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Progressive taxation involves taxing higher incomes at a higher rate than lower incomes.
Progressive taxation involves taxing higher incomes at a higher rate than lower incomes.
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The Lorenz Curve is a graphical representation of income distribution.
The Lorenz Curve is a graphical representation of income distribution.
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Social legislation includes laws that protect labor rights and regulate workplace safety.
Social legislation includes laws that protect labor rights and regulate workplace safety.
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A country has a comparative advantage in producing a good if it can produce that good more efficiently than another country.
A country has a comparative advantage in producing a good if it can produce that good more efficiently than another country.
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The Heckscher-Ohlin model explains international trade based on differences in factor endowments
The Heckscher-Ohlin model explains international trade based on differences in factor endowments
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Protectionism is a policy that encourages international trade.
Protectionism is a policy that encourages international trade.
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The goal of Trade Agreements is to reduce or eliminate trade barriers.
The goal of Trade Agreements is to reduce or eliminate trade barriers.
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Behavioral Economics combines insights from psychology and economics to understand how individuals make decisions, challenging the traditional economic assumptions of rationality and self-interest.
Behavioral Economics combines insights from psychology and economics to understand how individuals make decisions, challenging the traditional economic assumptions of rationality and self-interest.
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Development Economics focuses on the economic challenges and opportunities faced by underdeveloped countries.
Development Economics focuses on the economic challenges and opportunities faced by underdeveloped countries.
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Climate Change poses no real risks to agriculture, infrastructure, and human health.
Climate Change poses no real risks to agriculture, infrastructure, and human health.
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Mitigation refers to reducing greenhouse gas emissions to limit the extent of climate change.
Mitigation refers to reducing greenhouse gas emissions to limit the extent of climate change.
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Adaptation refers to preparing for the impacts of climate change through measures such as building resilience and investing in climate-resilient infrastructure.
Adaptation refers to preparing for the impacts of climate change through measures such as building resilience and investing in climate-resilient infrastructure.
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Carbon pricing is a market-based incentive for reducing emissions.
Carbon pricing is a market-based incentive for reducing emissions.
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Study Notes
Lecture Notes on Welfare Economics
- No part of these lecture notes may be reproduced, copied, or distributed without permission. These notes are for classroom use only and are an exception to copyright under Fair Use Doctrine. (Section 185. Fair Use of a Copyrighted Work).
List of Topics
- Topic 1: Introduction to Welfare Economics
- Topic 2: Market Efficiency and Welfare
- Topic 3: Tools of Welfare Analysis
- Topic 4: Public Goods and Externalities
- Topic 5: Income Distribution and Equity
- Topic 6: Welfare Economics and International Trade
- Topic 7: Current Issues in Welfare Economics
Topic 1-A: Understanding Welfare Economics
- Objectives of Welfare Economics: maximizing social welfare, balancing equity and efficiency, cost-benefit analysis
- Relationship with other economic fields: microeconomics, macroeconomics, public economics, environmental economics, and development economics
Topic 1-B: Utility, Social Welfare Functions, Pareto Efficiency, and Equity
- Utility: a measure of satisfaction from consuming goods and services (cardinal vs. ordinal)
- Social Welfare Functions: aggregate individual utilities into a single measure of overall social welfare (Utilitarian, Rawlsian, Social Contractarian)
- Pareto Efficiency: a situation where it's impossible to make one person better off without harming at least one other person.
- Equity: fair distribution of resources and opportunities; trade-off with efficiency
Topic 1-C: A Brief Overview of Welfare Economics Development
- Early Foundations (18th Century): Adam Smith, Jeremy Bentham
- Marginal Revolution (Late 19th Century): Jevons, Menger, Walras (marginal utility theory)
- Pareto Criterion (Early 20th Century): Vilfredo Pareto (Pareto improvement)
- New Welfare Economics (Mid-20th Century): Hicks, Kaldor, Meade (compensating variations, equivalent variations)
- Modern Welfare Economics: public, environmental, and behavioral economics
Perfect Competition: A Theoretical Ideal
- Many buyers and sellers
- Homogeneous products
- Perfect information
- Free entry and exit
- Implications: efficient allocation of resources, consumer surplus. producer surplus, innovation, social welfare maximization
- Limitations: market power, product differentiation, information asymmetry, barriers to entry
Market Failures: When Markets Don't Work
- Externalities (positive and negative)
- Public Goods
- Asymmetric Information (used car market, insurance, labor, and financial markets)
- Monopoly and Oligopoly
Topic 4: Public Goods and Externalities
- Public Goods: non-rivalrous, non-excludable, free-rider problem, optimal provision (compulsory taxation, direct provision, regulation, private provision)
- Externalities: positive (e.g., education) and negative (e.g., pollution) consequences affecting third parties, market failure, policy solutions (e.g., subsidies, taxes, regulation).
Topic 5: Income Distribution and Equity
- Income inequality: measures (Gini coefficient, Lorenz curve)
- Implications: reduced economic growth, social unrest, reduced health and well-being, intergenerational inequality
- Addressing income inequality: progressive taxation, social welfare programs, education and training, labor market reforms
Topic 6: Welfare Economics and International Trade
- Gains from Trade (specialization, increased variety, economies of scale)
- Absolute Advantage
- Comparative Advantage
- Heckscher-Ohlin Model
- Protectionism (tariffs, quotas, subsidies)
- Trade agreements (GATTS, NAFTA, WTO, EU)
Topic 7: Current Issues in Welfare Economics
- Behavioral economics: bounded rationality, loss aversion, status quo bias, social norms, nudges
- Development economics: poverty, economic growth, inequality, sustainability
- Climate Change and Welfare Analysis: Physical damages, economic losses, uncertainty, policy responses (mitigation, adaptation, carbon pricing)
Lesson G: Consumer Surplus
- Graphical representation (area below demand curve and above market price)
- Calculation: difference between what consumers are willing to pay and actual price
- Examples
Lesson H: Producer Surplus
- Graphical representation (area above supply curve and below market price)
- Calculation: difference between minimum price producers are willing to accept and actual price
- Examples
Lesson I: Deadweight Loss
- Graphical representation (triangle-shaped area between supply and demand curves). Loss of economic efficiency that occurs when the market is not in equilibrium
- Causes of deadweight loss (market failures, monopolies, taxes, subsidies, price controls).
- Examples
Lesson J: Cost-Benefit Analysis
- Steps in cost-benefit analysis (identify costs and benefits, quantify in monetary terms, discount future costs and benefits to present value, compare net present value).
- Hicks-Kaldor criterion (evaluates if a change leads to more benefits than costs, compensating those harmed)
Lesson W: Climate Change and Welfare Analysis
- Economic implications of climate change
- Policy responses (mitigation, adaptation, carbon pricing)
- Cost-benefit analysis and welfare analysis of climate change policies: Intergenerational equity is considered here
- Distributional effects
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Description
Explore the fundamental concepts of welfare economics through these lecture notes. Topics covered include market efficiency, public goods, income distribution, and current issues in the field. Gain insights on maximizing social welfare and understanding the relationship with other economic disciplines.
