McMaster University Impact of Economic Policies Discussion

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lllggy

Humanities

McMaster University

Question Description

I'm working on a psychology writing question and need guidance to help me learn.

write a 1-2 pages (2 pages maximum) summarizing a topic related to the course material covered that week -- welfare economics!!!

You are free to choose any topic related to the course material for that week. In the past, students have followed one of two strategies for their weekly writing assignments. One strategy involves summarizing multiple topics from the course material without going into depth on any one topic (because of the strict page limit). A second strategy involves focusing on one topic from the week in question and going into more depth. Both are strategies acceptable.

Importantly, your summary should be *in your own words* and not copy/paste/repeat phrases or equations from the course lecture slides. Students that violate the university's academic integrity policies (e.g. plagiarism) will automatically receive a grade of 0 and will be referred to the Faculty of Social Sciences. Assignments will be checked using Turnitin.com in order to detect plagiarism.

You will be graded both on what you write (i.e. content) and on the writing itself (i.e. spelling, grammar, organization and style). Assignments that demonstrate an understanding of the course material for that week and are written well should expect to receive a 4/5. Submissions that are not well written and/or that do not demonstrate an understanding of the course material will receive a grade of 3/5 or less. To receive a grade of 4.5/5 or 5/5, assignments must go above and beyond by providing insights/analysis that go beyond what is discussed in the lecture videos and the tutorials or that link the course material to real-world policy debates.

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Economics 3C03: Weekly Review 2 Welfare economics is the branch of economic theory concerned with the social desirability of different economic outcomes. In this overview of welfare economics, we will review the concept of Pareto efficiency and examine the First and Second Welfare Theorems in a simple economy. We begin with a brief discussion of Pareto efficiency, as it is fundamental to our understanding of the First and Second Welfare Theorems. Pareto efficiency is achieved when no individual in the economy can be made better-off without making another individual worse-off. To illustrate this concept we will imagine there are only two people in our economy; Adam and Eve, with just two goods; coconuts and bananas. In this case, a Pareto efficient allocation would mean that changing the distribution of coconuts or bananas to improve the welfare of one consumer would degrade the welfare of the other. We will expand on these notions soon. The First Welfare Theorem states that given: 1. Perfectly competitive markets. 2. A market for every commodity. free trade between individuals in the economy will result in a Pareto efficient equilibrium. Ignoring the technical conditions, we will demonstrate this intuitively by expanding on our simple economy. Suppose in our economy, Adam grows bananas and Eve grows coconuts and each of them need some bananas and some coconuts to survive. Beyond simply surviving, having more bananas and more coconuts makes them better-off because they enjoy eating (Don’t we all?). Adam and Eve will choose to trade with each other to maximize their enjoyment. They will trade bananas for coconuts until they decide that they can no longer reach an agreement. Adam and Eve are smart enough to not make themselves worse-off, so the trade does not continue beyond this point. This is a Pareto efficient allocation because trading more will make one of them worse-off, so it is impossible to move to a new allocation without violating our condition for Pareto efficiency. This is a simple example of the First Welfare Theorem in action. The Second Welfare Theorem states that any Pareto efficient allocation can be achieved by transferring resources between individuals in the economy. In the case of our simple economy, transferring coconuts or bananas away from their producer and giving them to the other. Suppose Adam grows so many bananas that the value of his bananas is far greater than the value of Eve’s coconuts. When Adam and Eve trade, Eve barely gets enough to survive while Adam enjoys lots of food. Society could choose to transfer some bananas to Eve before trade occurs, so that she can achieve a more fair allocation of food at the end of trade. The implication of the Second Welfare Theorem is that any Pareto efficient allocation can be achieved by distributing the right amount of goods in the beginning, then allowing trade. This would allow our simple economy to be more equitable between Adam and Eve. This is difficult to achieve in practice, as the notion of fairness in an economy is widely debated. Nevertheless, the Second Welfare Theorem implies that is it possible to create more fair outcomes by redistributing resources then allowing free trade. Now, we have studied Pareto efficiency and the implications of the First and Second Welfare Theorems in the context of a simple economy. Although we illustrated these principles with a simple economy, the notions generalize to more complex economies with millions of people and many goods. These principles are widely used in the study of welfare economics in Canada and abroad. Econ 3c03 assignment 2 week 2 Welfare economics is a branch of economics which deals with how to improve social welfare in the public sector using micro economic analysis. One of the main concepts discussed in welfare economics is Pareto optimality/efficiency. A P.O allocation is when an allocation of resources is such that there is no way to increase the well being of one individual without decreasing that of another individual. To illustrate this concept, an Edgeworth box is used which is in the shape of a rectangle/square and consists of two goods and two individuals. A pareto optimal allocation is when the indifference curves of both individuals are tangent to each other. There are multiple points in the box which represent pareto optimality. Connecting these points together gives us a curve, which is known as a contract curve. This represents all of the possible P.O points in an Edgeworth box. In algebraic terms, this relationship between the two indifference curves can be written as MRS of individual one= MRS of individual two. MRS is the marginal rate of substitution (the rate at which an individual gives up good 1 for good 2 while maintaining the same level of utility). The pareto optimal allocation can also be illustrated on a production possibility frontier. A production possibility frontier (PPF) is a graph which represents the production of good one on x axis and good 2 on the y axis. The slope of the ppf is known as the marginal rate of transformation (MRT) which is calculated as the marginal cost of good 1/the marginal cost of good 2. A point on the curve is Pareto optimal when the MRT= MRS of individual 1= MRS of individual 2. In the real world, it is next to impossible to achieve pareto optimality. There are two main reasons for it. Firstly, the existence of monopoly and imperfect competition means that resources are not efficiently utilised, and a dead weight loss is created. Therefore, the marginal rate of substitutions will not be equal to the marginal rate of transformation. Another reason for the non-existence of pareto optimal condition is due to externalities. Externality is the affect of production or consumption of a good on the third party. (society, larger community) An example of externality can be cigarettes, where people who do not smoke get affected by the air pollution caused by it. Externalities lead to imposition of taxes and restriction of quantities of good, which prevents pareto optimality. The state of not reaching Pareto efficiency is known as market failure. It is important for the governments and policy makers of countries to try and reduce the negative impact of monopolies on the overall economy of a country to reach closer to the pareto optimal condition. Econ 3c03 assignment 2 week 2 Welfare economics is a branch of economics which deals with how to improve social welfare in the public sector using micro economic analysis. One of the main concepts discussed in welfare economics is Pareto optimality/efficiency. A P.O allocation is when an allocation of resources is such that there is no way to increase the well being of one individual without decreasing that of another individual. To illustrate this concept, an Edgeworth box is used which is in the shape of a rectangle/square and consists of two goods and two individuals. A pareto optimal allocation is when the indifference curves of both individuals are tangent to each other. There are multiple points in the box which represent pareto optimality. Connecting these points together gives us a curve, which is known as a contract curve. This represents all of the possible P.O points in an Edgeworth box. In algebraic terms, this relationship between the two indifference curves can be written as MRS of individual one= MRS of individual two. MRS is the marginal rate of substitution (the rate at which an individual gives up good 1 for good 2 while maintaining the same level of utility). The pareto optimal allocation can also be illustrated on a production possibility frontier. A production possibility frontier (PPF) is a graph which represents the production of good one on x axis and good 2 on the y axis. The slope of the ppf is known as the marginal rate of transformation (MRT) which is calculated as the marginal cost of good 1/the marginal cost of good 2. A point on the curve is Pareto optimal when the MRT= MRS of individual 1= MRS of individual 2. In the real world, it is next to impossible to achieve pareto optimality. There are two main reasons for it. Firstly, the existence of monopoly and imperfect competition means that resources are not efficiently utilised, and a dead weight loss is created. Therefore, the marginal rate of substitutions will not be equal to the marginal rate of transformation. Another reason for the non-existence of pareto optimal condition is due to externalities. Externality is the affect of production or consumption of a good on the third party. (society, larger community) An example of externality can be cigarettes, where people who do not smoke get affected by the air pollution caused by it. Externalities lead to imposition of taxes and restriction of quantities of good, which prevents pareto optimality. The state of not reaching Pareto efficiency is known as market failure. It is important for the governments and policy makers of countries to try and reduce the negative impact of monopolies on the overall economy of a country to reach closer to the pareto optimal condition. Economics 3C03: Weekly Review 2 Welfare economics is the branch of economic theory concerned with the social desirability of different economic outcomes. In this overview of welfare economics, we will review the concept of Pareto efficiency and examine the First and Second Welfare Theorems in a simple economy. We begin with a brief discussion of Pareto efficiency, as it is fundamental to our understanding of the First and Second Welfare Theorems. Pareto efficiency is achieved when no individual in the economy can be made better-off without making another individual worse-off. To illustrate this concept we will imagine there are only two people in our economy; Adam and Eve, with just two goods; coconuts and bananas. In this case, a Pareto efficient allocation would mean that changing the distribution of coconuts or bananas to improve the welfare of one consumer would degrade the welfare of the other. We will expand on these notions soon. The First Welfare Theorem states that given: 1. Perfectly competitive markets. 2. A market for every commodity. free trade between individuals in the economy will result in a Pareto efficient equilibrium. Ignoring the technical conditions, we will demonstrate this intuitively by expanding on our simple economy. Suppose in our economy, Adam grows bananas and Eve grows coconuts and each of them need some bananas and some coconuts to survive. Beyond simply surviving, having more bananas and more coconuts makes them better-off because they enjoy eating (Don’t we all?). Adam and Eve will choose to trade with each other to maximize their enjoyment. They will trade bananas for coconuts until they decide that they can no longer reach an agreement. Adam and Eve are smart enough to not make themselves worse-off, so the trade does not continue beyond this point. This is a Pareto efficient allocation because trading more will make one of them worse-off, so it is impossible to move to a new allocation without violating our condition for Pareto efficiency. This is a simple example of the First Welfare Theorem in action. The Second Welfare Theorem states that any Pareto efficient allocation can be achieved by transferring resources between individuals in the economy. In the case of our simple economy, transferring coconuts or bananas away from their producer and giving them to the other. Suppose Adam grows so many bananas that the value of his bananas is far greater than the value of Eve’s coconuts. When Adam and Eve trade, Eve barely gets enough to survive while Adam enjoys lots of food. Society could choose to transfer some bananas to Eve before trade occurs, so that she can achieve a more fair allocation of food at the end of trade. The implication of the Second Welfare Theorem is that any Pareto efficient allocation can be achieved by distributing the right amount of goods in the beginning, then allowing trade. This would allow our simple economy to be more equitable between Adam and Eve. This is difficult to achieve in practice, as the notion of fairness in an economy is widely debated. Nevertheless, the Second Welfare Theorem implies that is it possible to create more fair outcomes by redistributing resources then allowing free trade. Now, we have studied Pareto efficiency and the implications of the First and Second Welfare Theorems in the context of a simple economy. Although we illustrated these principles with a simple economy, the notions generalize to more complex economies with millions of people and many goods. These principles are widely used in the study of welfare economics in Canada and abroad.
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Explanation & Answer

View attached explanation and answer. Let me know if you have any questions.

1

Welfare Economics

Name
Affiliation
Course
Instructor
Date

2
Welfare Economics
The concern of welfare economics is the impact of economic policies on the wellbeing of
the community/public. At the center of welfare economics is the concept of Pareto
efficiency/optimality. Pareto optimality is attained when it is not possible to improve the welfare
of one individual without hurting that of another individual. At this point, all resources have been
moved to their most highly valued uses, and no further improvements can be attained.
Two theorems explain welfare: the f...

angnfunoenval (8902)
New York University

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