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efficiency of a competitive general equilibrium外文电子书籍.doc

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PAGE PAGE 1 EC111 Introduction to Economics 2012/13 EC111 Introduction to Economics Lecture 10 Lecture 10 Lecture Outline: Efficiency of a competitive general equilibrium Welfare theorems Market failures Essential reading: Begg et al: Ch. 13, 14 (especially 13.1-13.4; 14.1-14.3) or Sloman and Wride ch. 11 1) Competitive general equilibrium When we consider a single market, for example the labour market, we make a Partial Equilibrium Analysis. This means that we focus on that market only without looking at the possible links with other markets. However, in an economy all markets are normally linked. If something happens in one market, it will affect also other markets. For example, recently the house market in US went down. That affects the credit market. The fact that the credit market went down affects the goods market and also the labour market (more unemployment), etc. etc. We will focus on an economy with few markets: there will be two goods produced, so we have two goods market, and two factor markets, one for labour and one for capital. All markets will be competitive. We want to see what the main properties of that economy in terms of efficiency are. First we need to introduce a way to measure efficiency. The concept of efficiency we use is the Pareto Efficiency criterion. 2) Pareto Efficiency The Pareto criterion is a key value judgement. Definition: it says that situation A is preferred to situation B if in A at least one person is better off and no one is worse off than in B. This is a very stringent criterion. However, it is simple and it gives a clear idea about what efficiency is. Example: sharing a cake between two people. At point A individual A has the whole cake and gets utility UA; at point B individual B gets the whole cake and gets utility UB. We cannot say whether allocation C is Pareto superior to either A or B because as compared with C one person is worse off. Allocation E is Pareto superior to C, because both individuals are bette