Chapter 3-Tools of Normative Analysis Public economics
1 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
2 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
3 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 Ey Adam← Apples per year
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 Ov of apples, and Ow of gs
5 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