Welfare eonomics final

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Welfare eonomics final

  1. 1. 1WELFAREECONOMICSSubject: Managerial EconomicsMMS Batch 1
  2. 2. 2What is it?• Branch of economics concerning “Social Welfare”• Concepts • Demand curve • Supply curve • Consumer and producer surplus
  3. 3. 3 Measuring the gain from trade for consumers• Demand curve = marginal value curve• Total value for consumers toP purchase q units at price pd is S the area underneath the demand curve• Total expenditure for consumers to purchase q pd p units at price pd equals pd *q.• Consumer’s surplus (CS) DCS = Total Value –Expenditure the area between the q Q demand curve and the price line
  4. 4. 4Measuring the gain from tradefor producers• Supply curve is the marginal cost curve• The total variable cost for P the supplier to produce q S units of output at price ps is the area underneath of the supply curve ps• The total revenue for the producer to produce q units of output at price ps equals ps*q D• Producer’s surplus (PS) q Q PS=Total revenue - VC
  5. 5. 5Dead Weight Loss• A gain that could have been created but weren’t.• A reduction in social gain because of policy intervention.• The tax policy is not efficient in the sense that social gain can be increased by dropping the tax.
  6. 6. 6Price Control• What is price control• Price ceiling and price floor• Binding and non-binding price floor/ceiling• Examples • Price floor- Agricultural products • Price ceiling- Life-saving drugs
  7. 7. 7The Invisible Hand• Competitive equilibrium without government intervention is often to be the most efficient.• The invisible hand theorem essentially says that “in competitive markets, people who selfishly pursue their own interests end up achieving an outcome that is socially desirable.”
  8. 8. 8Externalities• What are externalities?• Types- • Positive Externality • Negative Externality• Government can affect the outcome of an activity by its policies. Example: Exhaust from automobiles, restored historic buildings• Negative externality (eg: Aluminium market) and positive externality (eg: Education) w.r.t to the demand supply curve
  9. 9. 9Arthur Cecil Pigou (1877-1959)• Marshall’s successor, master of neoclassical economics.• Chair of political economy at Cambridge from 1908 to 1943.• Takes a softer view toward a larger role government• 1920, The Economics of Welfare • Method • Makes case for income distribution • Theory of externalities
  10. 10. 10Pigou Tax• Tax applied to market activities that generate negative externalities• Example- Tax on tobacco, alcohol, etc.• CSR (Voluntary)
  11. 11. 11The Invisible Hand• Competitive equilibrium without government intervention is often to be the most efficient.• The invisible hand theorem essentially says that “in competitive markets, people who selfishly pursue their own interests end up achieving an outcome that is socially desirable.”
  12. 12. 12The Compensation Principle• Decision rule used to select between alternate feasible ‘social states’• “If there are net gains to any economic change sufficient to compensate any losers, then it should go ahead, regardless of whether or not the compensation is actually paid”• Welfare economics relates to cost-benefit analysis• Application to real life problems like free trade
  13. 13. 13Case Study 1:The Compensation Principle• All clothing manufacturers shut shops in Italy• All items physically produced in Asia (ex. Roma, an Italian design house opening a manufacturing facility in India- 1,000 new jobs in India and 200 in Italy)• Italy is now a booming design industry and a regional hub of fashion design using IT- job creation• Both parties are better off in economic terms
  14. 14. 14Case Study 2: Gasoline Tax• Gasoline heavily taxed• Reasons- • Traffic congestion • Accidents • Pollution• Consequences- • Conservation of fuel • Reduction in carbon footprint
  15. 15. Amartya Sen’s Contribution• Outstanding economic theorist• Nobel memorial prize (1998)• Utilitarian approach • Act consequantialism • Welfarism • Sum-ranking
  16. 16. 16THANK YOU !

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