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Fair Allocations OA OB Post-trade allocation -- is it fair? Swap A’s and B’s post-trade allocations A does not envy B’s post-trade allocation. B does not envy A’s post-trade allocation. Fair Allocations OA OB Post-trade allocation -- is it fair? Swap A’s and B’s post-trade allocations Post-trade allocation is Pareto-efficient and envy-free; hence it is fair. Summary Social preference Social welfare function Arrow’s impossibility theorem Fairness Social Welfare Functions ui(x) is individual i’s utility from overall allocation x. Utilitarian: Weighted-sum: Social Welfare Functions ui(x) is individual i’s utility from overall allocation x. Utilitarian: Weighted-sum: Minimax: Social Welfare Functions Suppose social welfare depends only on individuals’ own allocations, instead of overall allocations. I.e. individual utility is ui(xi), rather than ui(x). Then social welfare iswhere is an increasing function. Social Optima Efficiency Any social optimal allocation must be Pareto optimal. Why? If not, then somebody’s utility can be increased without reducing anyone else’s utility; i.e. social suboptimality ? inefficiency. Utility Possibilities OB OA 0 0 Utility Possibilities OB OA 0 0 Utility Possibilities OB OA 0 0 Utility Possibilities OB OA 0 0 Utility Possibilities OB OA 0 0 Utility Possibilities OB OA 0 0 Utility Possibilities OB OA 0 0 Utility possibility frontier (upf) Utility possibility set Social Optima Efficiency Upf is the set of efficient utility pairs. Social Optima Efficiency Upf is the set of efficient utility pairs. Social indifference curves Social Optima Efficiency Upf is the set of efficient utility pairs. Social indifference curves Higher social welfare Social Optima Efficiency Upf is the set of efficient utility pairs. Social indifference curves Social optimum is efficient. Fair Allocations Some Pareto efficient allocations are “unfair”. E.g.