1.3 Welfare Economics and the Environment

Question 1

allocative inefficiency

Answer 1

• inefficiency as a result of choices
• may happen even when there are no technical inefficiencies

Question 2

technical efficiency

Answer 2

With a certain input the output will be maximized

ex. well-insulated houses require less energie to warm the house

Question 3

social costs

Answer 3

clean up costs, health costs, …

Question 4

optimality

Answer 4

maximization of overall objectives given any relevant constraints that are operating

• efficiency is a necessary condition for optimality BUT it’s not sufficient
• multiplicity of different efficient resource allocation but only one is the best

Question 5

allocation

Answer 5

• WHAT goods are produced
• what QUANTITIES are produced
• WHICH COMBINATIONS of resource inputs are used in producing these goods
• HOW are the outputs distributed between persons

Question 6

externalities

Answer 6

the activity has an impact on someone/something else in an unintended way + no compensation paid

can be beneficial or harmful, source of market failure

Question 7

Pareto improvement

Answer 7

gains/improvement without anyone else suffering

change in allocation harms no one and improves the condition of at least one person

(-) fairness and equality are not taken into account

Question 8

economic efficiency

Answer 8

• the Pareto optimal allocation of resources
• no further Pareto improvements are possible

three conditions
- efficiency in consumption
- efficiency in production
- product-mix efficiency

Question 9

production possibility frontier

Answer 9

output combinations that the economy can produce using all resources

Question 10

utility possibility frontier

Answer 10

represents possible utility combinations that correspond to efficiency in allocation

Question 11

optimal combination

Answer 11

The combination that is best form a society point of view

Question 12

SWF

Answer 12

social welfare function

function of the utility/hapiness level of the society

• rank alternative allocations is possible
• depends on societal objectives and ethical choices
• non decreasing in utility levels of both individuals
• difficult to calculate this, to much ethical considerations

Question 13

Kaldor compensation test

Answer 13

The best allocation is the one were the winner COULD compensate the loser and still be better off

(-) no requirement of the compensation -> responsibility of policy makers

(-) might support reallocation in two directions

Question 14

Hicks compensation test

Answer 14

Can the loser compensate the winner for foregoing the move and be no worse than if the move took place

Question 15

kaldor-hicks-scitovsky test

Answer 15

Combine kaldor and hicks criteria

Question 16

pure private good

Answer 16

excludable and rivalrous
ex. ice cream

Question 17

congestive resource

Answer 17

excludable and non-rivalrous
ex. wilderness area

Question 18

open acces resource

Answer 18

non-excludable and rivalrous
ex. oceaan fishery in international waters

Question 19

pure public good

Answer 19

non-excludable and non-rivalrous
ex. national defence

not everyone has the same value towards the pure public good

Question 20

coase theorem

Answer 20

private bargaining can correct externality problems and lead to efficient outcomes

(-) transaction costs are zero; property rights allocation effects wealth

Question 21

private marginal cost

Answer 21

PMC
= input costs that a firm needs to take into account when deciding there output level

PMC = deltaC/deltaY

Question 22

marginal external cost

Answer 22

MEC
= sum of the willingness to pay by the ‘sufferers’ to reduce suffering in a small amount

Question 23

social marginal costs

Answer 23

SMC = PMC + MEC