Self-assessment questions for lecture 4, Distribution and Welfare
Question 1: When does a policy change satisfy the Pareto-criterion?
A reallocation is said to be a Pareto improvement if at least one person is made better off and nobody is made worse off. However in practice, it is almost impossible to take any social action, such as a change in economic policy, without making at least one person worse off. Even voluntary exchanges may not be Pareto improving if they make third parties worse off.
Question 2: Define: Social welfare function! Which arguments are permissible in a Paretian social welfare function? How would a proponent of a Paretian social welfare function justify the provision of clean environment or the pursuit of national sovereignty which are normally referred to as the “common good”?
In welfare economics, a social welfare function is a function that ranks social states as less desirable, more desirable, or indifferent for every possible pair of social states. In a Paretian Welfare function only individual utility
is permitted as an argument and W increases in U, so if both are better off, society is better off. A non-Paretian Welfare function may have other arguments such as G = environmental quality
In order to justify the provision of clean environment or the pursuit of national sovereignty which are normally referred as the “common good” ideally, we would want to derive SWF (or the underlying social ranking over social alternatives) from individual rankings (i.e. preferences). However, all procedures of aggregating individual preferences into a social ranking violate some reasonable axioms (for example, the social ranking may be inconsistent).
Question 3: Define a utilitarian (or Benthamite) social welfare function. What is the shape of its social indifference curves in utility space?
A utilitarian welfare function sums the utility of each individual in order to obtain society's overall welfare. All people are treated the same, regardless of their initial level of utility. One extra unit of utility for a starving person is not seen to be of any greater value than an extra unit of utility for a millionaire.
A utilitarian social indifference curve is linear and downward sloping to the right. The Max-Min social indifference curve takes the shape of two straight lines joined so as they form a 90-degree angle. A social indifference curve drawn from an intermediate social welfare function is a curve that slopes downward to the right.
Question 4: How do social indifference curves of a utilitarian (or Benthamite) social welfare function look like in consumption space?
A social indifference curve drawn from an intermediate social welfare function is a curve that slopes downward to the right.