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Flashcards in Week 3- Welfare economics Deck (18):

welfare economics is..

study of how the allocation of scarce resources affects economic well being


consumer surplus

-the difference between price a consumer is willing to pay and what is actually payed
- a good measure of social welfare


producer surplus

-amount seller Is paid for good or service supplied minus cost of production (profit)


Total surplus

- consumer + producer surplus
-net benefit of the specific market to the economy


Spending on different sectors e.g education increases...

consumer and producer surplus, increasing welfare


Criteria for comparing economic welfare outcomes for alternative policies

- Pareto criterion
- Kaldor-Hicks compensation criterion


Pareto criterion

-is most unambiguous
-public program is considered desirable if at least one person gains while no-one loses
- most unlikely outcome^


Kaldor-Hicks compensation criterion

- More useful that Pareto in todays economy
- increase in society's welfare occurs if the gainer from a policy could hypothetically compensate the losers ad still be better off than in the absence of the project
- not about equity, about efficiency
-compatible with making the poor still poorer as long as the rich gain enough to 'theoretically' compensate the poor.
- If compensation is actually paid the Kalder-Hicks compensation is equivalent to parents criterion (aka 'potential Pareto improvement criterion).


Kaldor-Hicks improvement

a policy unambiguously increases total surplus


Draw: effect of fast-growing plantations on sawn wood to market.
Are consumers unambiguously better off?
Are producers unambiguously better off?
Is it a Kaldor Hicks improvement

-Supply curves shifts down to right
-Consumers unambiguously better of
-producers benefit ambiguous
-Kaldor Hicks improvement (society is better of, because total surplus is unambiguously higher)
- consumers could theoretically compensate the producers


draw: implementation of tax on imported steel levied on consumers
levied on producers
tax wedge for both, labelling new consumer and producer surplus
and deadweight loss

- levied on consumers, demand shifts down to left
- levied on producers, supply shifts up left.
-same equilibrium
- tax burden shared between both consumers and producers


deadweight loss

-loss of consumer and producer surplus from the implication of a tax
- the area of deadweight loss is where production and consumption used to exist, now doesn't due to tax
- can be good (cigarettes)


welfare implications of taxation

market is worse-off, unless the tax revenue is spent on issues (e.g coral reef protection) that create benefits that outweigh the losses from the market


Determinants of deadweight loss size

- inelastic demand + supply: small deadweight loss
- elastic supply + demand: large


Adam Smith's 'Invisible hand'

- people acting in their own self interest tent to promote the social interest, as if led by an invisible hand
- by doing this, the market naturally moves to market equilibrium


Free market system can maximise social well-being

- little need for gov. intervention in an economy to ensure goods and services are produced in sufficient quantities and available to those who need them most


Are free markets an ideal to strive for?

-Globally, reliance on free-market system increasing
- violent anti-globalisationn protests, due to impact of free markets on environmental quality
- western companies will move operations to countries where emissions/pollution regulations are more relaxed


Draw: a) why entry fee on GBR could generate substantial revenues for gov, while entry free at local park may not.
c) if no externalities arising fro use of local park, is tax likely to represent a Kaldor-Kicks improvement

a) GBR inelastic demand, local park elastic demand
c) no, because the total benefit to society (consumer surplus, producer surplus and tax revenue combined) must be greater with the tax, than without the tax, so it can hypothetically compensate the losers, and still be better off