Week 2 - Ethical Aspects of the Pareto Criterion Flashcards
(29 cards)
What is the main focus of neoclassical economics in making normative judgments?
The notion of Pareto efficiency
Pareto efficiency involves value judgments regarding individual preferences.
What is a key criticism of the Pareto criterion?
It neglects distributional issues
An allocation where one person has everything can still be Pareto efficient.
What does the first Fundamental Theorem of Welfare Economics (FTWE) emphasize?
Efficiency without addressing welfare distribution
It does not allow for interpersonal comparisons of welfare.
What does the second Fundamental Theorem of Welfare Economics (2nd FTWE) state?
any Pareto-efficient allocation can be achieved as a competitive equilibrium by redistributing initial endowments, allowing for a separation of efficiency and distribution issues.
Assumes complete competitive markets and convex preferences.
What is a key implication of the 2nd FTWE regarding government intervention?
Government should use lump-sum taxes and transfers to alter initial endowments and then leave the market to allocate resources
This separates efficiency from distributional concerns.
What are lump-sum taxes and transfers characterized as?
Non-distortionary
They do not alter behavior required for Pareto efficiency.
What is the Kaldor-Hicks compensation test?
A policy can increase efficiency if beneficiaries can hypothetically compensate losers
It extends the Pareto criterion to evaluate policies affecting multiple parties.
What does Amartya Sen argue about the concept of well-being?
Preference-satisfaction provides a distorted view of well-being
He suggests capabilities as a better measure of welfare.
What is James Buchanan’s critique of the Pareto criterion?
It assumes omniscience in the observer regarding individual preferences
Buchanan argues that preferences can only be known through individuals’ choices.
What is the ‘nirvana fallacy’?
The assumption that a perfect government can correct market failures
It overlooks potential government failures.
What does Public Choice Theory (PCT) suggest about politicians?
They act as rational utility-maximizers, often prioritizing political support over public interest
This leads to potential failures in government intervention.
What challenge do rationally ignorant voters pose to democratic scrutiny?
Effective scrutiny is underprovided as individual voters have little incentive to gather information
Voting is a public good.
Fill in the blank: The second Fundamental Theorem of Welfare Economics separates considerations of ______ from distributional concerns.
efficiency
True or False: The Pareto criterion can effectively compare outcomes where some individuals gain while others lose.
False
What must be analyzed when assessing the potential effectiveness of government intervention?
The incentives and information available to public sector actors
This is part of a comparative institutional analysis.
What is the primary role of an economist according to Buchanan?
To diagnose social situations and present possible changes without claiming to know optimal policies
Economists should test hypotheses through democratic processes.
What is a consequence of rationally ignorant voters?
Effective scrutiny of government decisions is a public good that is underprovided
This is due to voters having little incentive to acquire information for informed voting.
What are the typical outcomes of state intervention in the economy?
State intervention creates both winners and losers
Benefits are often concentrated while costs are dispersed.
What issue arises from majoritarian voting?
Voters on the winning side can impose external costs on losers
Losers bear the costs of taxes for policies they do not support.
Define rent-seeking behavior.
Efforts by groups to persuade government to pursue policies that benefit them
This leads to the enjoyment of economic rent by those groups.
What is the social impact of rent-seeking?
Rent-seeking generates social waste rather than social surplus
Resources used for lobbying could have been utilized for productive goods.
What is productive inefficiency?
Failure to minimize the cost of providing public services
This leads to excessive expenditure in the public sector.
What is allocative inefficiency?
The mix of services provided does not match user preferences
This occurs when government is the monopoly supplier.
What is meant by ‘soft budget constraint’ in the public sector?
Public sector losses can be covered by extra government funding
This reduces incentives for efficiency.
