GENERAL 2 Flashcards
What does the First Fundamental Theorem of Welfare Economics state?
Under perfect competition, complete markets, no externalities, and convex preferences, every Walrasian equilibrium allocation is Pareto optimal—no one can be made better off without hurting someone else.
Why are the theorem’s assumptions critical—and often criticized?
- Complete markets: Every contingent good must be tradable—unrealistic for future states. 2. Perfect information: Agents know all prices and payoffs—contradicted by real-world asymmetries. 3. No externalities: Ignores pollution and public goods. 4. Convexity: Assumes diminishing returns and smooth preferences; fails with indivisibilities or increasing returns.
What is market failure, and how does it arise?
A breakdown of Pareto optimality due to violated assumptions—typified by public goods (non-rivalry), externalities (e.g., pollution), monopolies, and information asymmetries.
What does the Second Fundamental Theorem imply for policy?
Any Pareto‐efficient outcome can be decentralised via lump-sum transfers followed by prices—so equity concerns can be separated from efficiency, in principle.
Define Pareto efficiency in welfare economics.
An allocation is Pareto efficient if no other allocation can improve at least one individual’s welfare without reducing another’s. It’s a minimal efficiency benchmark—silent on fairness or distribution.
What are the ethical and practical limitations of Pareto efficiency?
- Equity blind: Cannot compare trade-offs when some lose and others gain. 2. Preference‐satisfaction focus: Ignores well-being aspects like health or capabilities (Sen). 3. Status quo bias: Only improvements over existing allocation count.
What is government failure in public choice theory?
When interventions intended to correct market failures produce worse outcomes—due to rent-seeking, bureaucratic inefficiency, informational constraints, or political incentives.
Why might government failures outweigh market failures?
High transaction costs in the political process, concentrated lobbying gains versus diffuse public costs, and institutional rigidities can make regulation and redistribution far costlier than the original market distortion.
What exactly are externalities?
Spillover effects—either positive (e.g., vaccination) or negative (e.g., pollution)—where private decisions impose unpriced costs or benefits on third parties.
State and unpack the Coase Theorem.
If property rights are clearly defined and transaction costs are zero, parties will bargain to correct externalities and reach efficient outcomes regardless of initial rights assignment—but real‐world frictions limit its direct applicability.
What are transaction costs, and why do they matter for externality resolution?
Costs of identifying affected parties, negotiating, and enforcing agreements—high costs can preclude Coasean bargaining and justify Pigovian taxes or regulation.
Compare Pigouvian versus Coasean solutions.
- Pigou: Government levies taxes (negative externalities) or provides subsidies (positive) equal to the marginal external cost/benefit. - Coase: Assign property rights; let private negotiation internalize costs if bargaining is frictionless.
Why move “beyond markets and states” in institutional analysis?
Real social coordination often uses hybrids—commons regimes, firms, NGOs—so binary market-state models miss critical governance diversity and adaptive potential.
What is polycentric governance (Ostrom)?
Multiple, overlapping decision centers (local councils, co-ops, national agencies) operating at different scales, enabling experimentation, mutual monitoring, and localized problem solving.
Explain co-production of public goods.
Joint production by state and citizens (e.g., community‐managed policing), leveraging local knowledge and shared incentives to improve efficiency and accountability.
What is Rawls’s Veil of Ignorance?
A device where principals choose justice rules without knowing their own social position, ensuring impartiality and fairness—leads to equal liberties and the Difference Principle.
What principles emerge from Rawls’s original position?
(1) Equal basic liberties for all; (2) social and economic inequalities arranged to benefit the least advantaged (Difference Principle).
What is Nozick’s Entitlement Theory?
Justice in holdings arises from just acquisition, voluntary transfer, or rectification; any patterned distributive principle (e.g., end-state) violates individual rights.
How does Dworkin’s Equality of Resources work?
Start everyone with equal resources; allow unequal outcomes only when reflecting choices, while compensating for “brute luck” disadvantages.
Distinguish ideal from non-ideal theory.
- Ideal: Construct full‐compliance models with perfect information—highly abstract, risk unrealistic policy. - Non-ideal: Incorporate incentive, informational, and compliance constraints to offer actionable recommendations.
What motivational and epistemic constraints drive non-ideal theory?
- Motivational: Self‐interest, partial compliance, ideological diversity. 2. Epistemic: Bounded rationality, dispersed knowledge in complex systems (Hayek’s dispersed knowledge argument).
What is symmetrical idealization?
Comparing regimes (capitalism vs. socialism) under identical ideal assumptions (full compliance, perfect information) to ensure fair institutional comparison.
On what grounds does Cohen argue socialism superior under idealized conditions?
Collective ownership fosters egalitarian sharing, community cooperation, and eliminates market-driven inequalities—under assumptions of perfect motivation and coordination.
How does Brennan defend capitalism as the superior ideal?
Incentive structures in markets promote innovation, efficiency, and individual freedom—under idealized self-interest assumptions.
