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Compensation Principle
In welfare economics, the compensation principle refers to a decision rule used to select between pairs of alternative feasible social states. One of these states is the hypothetical point of departure ("the original state"). According to the compensation principle, if the prospective gainers could compensate (any) prospective losers and leave no one worse off, the alternate state is to be selected (Chipman, 1987, p. 524). An example of a compensation principle is the Pareto criterion in which a change in states entails that such compensation is not merely feasible but required. Two variants are: * the Pareto principle, which requires any change such that ''all'' gain. * the (strong) Pareto criterion, which requires any change such that ''at least one'' gains and no one loses from the change. In non-hypothetical contexts such that the compensation occurs (say in the marketplace), invoking the compensation principle is unnecessary to effect the change. But its use is more ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Welfare Economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level. Attempting to apply the principles of welfare economics gives rise to the field of public economics, the study of how government might intervene to improve social welfare. Welfare economics also provides the theoretical foundations for particular instruments of public economics, including cost–benefit analysis, while the combination of welfare economics and insights from behavioral economics has led to the creation of a new subfield, behavioral welfare economics. The field of welfare economics is associated with two fundamental theorems. The first states that given certain assumptions, competitive markets produce ( Pareto) efficient outcomes; it captures the logic of Adam Smith's invisible hand. The second states that given further restrictions, any Pareto efficient outcome can be supported as a competitive market equilibrium. Th ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Pareto Efficiency
Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engineer and economist, who used the concept in his studies of economic efficiency and income distribution. The following three concepts are closely related: * Given an initial situation, a Pareto improvement is a new situation where some agents will gain, and no agents will lose. * A situation is called Pareto-dominated if there exists a possible Pareto improvement. * A situation is called Pareto-optimal or Pareto-efficient if no change could lead to improved satisfaction for some agent without some other agent losing or, equivalently, if there is no scope for further Pareto improvement. The Pareto front (also called Pareto frontier or Pareto set) is the set of all Pareto-efficient situations. Pareto originally used the word "optimal" for t ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Perfect Competition
In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoretical models where conditions of perfect competition hold, it has been demonstrated that a Market (economics), market will reach an Economic equilibrium, equilibrium in which the quantity supplied for every Goods and services, product or service, including Workforce, labor, equals the quantity demanded at the current price. This equilibrium would be a Pareto optimum. Perfect competition provides both allocative efficiency and productive efficiency: * Such markets are ''allocatively efficient'', as output will always occur where marginal cost is equal to average revenue i.e. price (MC = AR). In perfect competition, any Profit maximization, profit-maximizing producer faces a market price equal to its marginal cost (P = MC). This implies that ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Imperfect Competition
In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it happens, resulting in market failure. Imperfect competition is a term usually used to describe the seller's position, meaning that the level of competition between sellers falls far short of the level of competition in the market under ideal conditions. The structure of a market can significantly impact the financial performance and conduct of the firms competing within it. There is a causal relationship between structure, behaviour and performance paradigm. The characteristics of market structure can be measured by evaluating the degree of seller's market concentration to determine the nature of market competition. The degree of market power refers to the firms' ability to affect the price of a good and thus, raise the market price of the go ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Social Choice And Individual Values
Kenneth Arrow's monograph ''Social Choice and Individual Values'' (1951, 2nd ed., 1963, 3rd ed., 2012) and a theorem within it created modern social choice theory, a rigorous melding of social ethics and voting theory with an economic flavor. Somewhat formally, the "social choice" in the title refers to Arrow's representation of how ''social values'' from the ''set of individual orderings'' would be implemented under the ''constitution''. Less formally, each social choice corresponds to the feasible set of laws passed by a "vote" (the set of orderings) under the constitution even if not every individual voted in favor of all the laws. The work culminated in what Arrow called the "General Possibility Theorem," better known thereafter as Arrow's (impossibility) theorem. The theorem states that, absent restrictions on either individual preferences or neutrality of the constitution to feasible alternatives, there exists no social choice rule that satisfies a set of plausible requir ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Cost–benefit Analysis
Cost–benefit analysis (CBA), sometimes also called benefit–cost analysis, is a systematic approach to estimating the strengths and weaknesses of alternatives. It is used to determine options which provide the best approach to achieving benefits while preserving savings in, for example, transactions, activities, and functional business requirements. A CBA may be used to compare completed or potential courses of action, and to estimate or evaluate the value against the cost of a decision, project, or policy. It is commonly used to evaluate business or policy decisions (particularly public policy), commercial transactions, and project investments. For example, the U.S. Securities and Exchange Commission must conduct cost-benefit analyses before instituting regulations or deregulations. CBA has two main applications: # To determine if an investment (or decision) is sound, ascertaining if – and by how much – its benefits outweigh its costs. # To provide a basis for comparing inve ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Compensating Variation
In economics, compensating variation (CV) is a measure of utility change introduced by John Hicks (1939). 'Compensating variation' refers to the amount of additional money an agent would need to reach their initial utility after a change in prices, a change in product quality, or the introduction of new products. Compensating variation can be used to find the effect of a price change on an agent's net welfare. CV reflects new prices and the old utility level. It is often written using an expenditure function, e(p,u): :CV = e(p_1, u_1) - e(p_1, u_0) : = w - e(p_1, u_0) : = e(p_0, u_0) - e(p_1, u_0) where w is the wealth level, p_0 and p_1 are the old and new prices respectively, and u_0 and u_1 are the old and new utility levels respectively. The first equation can be interpreted as saying that, under the new price regime, the consumer would accept ''CV'' in exchange for allowing the change to occur. More intuitively, the equation can be written using the value function, v(p, ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Cost–benefit Analysis
Cost–benefit analysis (CBA), sometimes also called benefit–cost analysis, is a systematic approach to estimating the strengths and weaknesses of alternatives. It is used to determine options which provide the best approach to achieving benefits while preserving savings in, for example, transactions, activities, and functional business requirements. A CBA may be used to compare completed or potential courses of action, and to estimate or evaluate the value against the cost of a decision, project, or policy. It is commonly used to evaluate business or policy decisions (particularly public policy), commercial transactions, and project investments. For example, the U.S. Securities and Exchange Commission must conduct cost-benefit analyses before instituting regulations or deregulations. CBA has two main applications: # To determine if an investment (or decision) is sound, ascertaining if – and by how much – its benefits outweigh its costs. # To provide a basis for comparing inve ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Kaldor–Hicks Efficiency
A Kaldor–Hicks improvement, named for Nicholas Kaldor and John Hicks, is an economic re-allocation of resources among people that captures some of the intuitive appeal of a Pareto improvement, but has less stringent criteria and is hence applicable to more circumstances. A re-allocation is a Kaldor–Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off and lead to a Pareto-improving outcome. The compensation does not actually have to occur (there is no presumption in favor of status-quo) and thus, a Kaldor–Hicks improvement can in fact leave some people worse off. A situation is said to be Kaldor–Hicks efficient, or equivalently is said to satisfy the Kaldor–Hicks criterion, if no potential Kaldor–Hicks improvement from that situation exists. If an outcome is the highest it could possibly be, it is called a Hicks-optimal outcome. A Hicks optimal outcome is always Pareto efficient. Explanation A reallocatio ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Social Choice Theory
Social choice theory or social choice is a theoretical framework for analysis of combining individual opinions, preferences, interests, or welfares to reach a ''collective decision'' or ''social welfare'' in some sense.Amartya Sen (2008). "Social Choice,". ''The New Palgrave Dictionary of Economics'', 2nd EditionAbstract & TOC./ref> Whereas choice theory is concerned with individuals making choices based on their preferences, social choice theory is concerned with how to translate the preferences of individuals into the preferences of a group. A non-theoretical example of a collective decision is enacting a law or set of laws under a constitution. Another example is voting, where individual preferences over candidates are collected to elect a person that best represents the group's preferences. Social choice blends elements of welfare economics and public choice theory. It is methodologically individualistic, in that it aggregates preferences and behaviors of individual member ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Welfare Economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level. Attempting to apply the principles of welfare economics gives rise to the field of public economics, the study of how government might intervene to improve social welfare. Welfare economics also provides the theoretical foundations for particular instruments of public economics, including cost–benefit analysis, while the combination of welfare economics and insights from behavioral economics has led to the creation of a new subfield, behavioral welfare economics. The field of welfare economics is associated with two fundamental theorems. The first states that given certain assumptions, competitive markets produce ( Pareto) efficient outcomes; it captures the logic of Adam Smith's invisible hand. The second states that given further restrictions, any Pareto efficient outcome can be supported as a competitive market equilibrium. Th ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Theory Of Second Best
In welfare economics, the theory of the second best (also known as the general theory of second best or the second best theorem) concerns the situation when one or more optimality conditions cannot be satisfied. The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal. Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing one or more ''additional'' market distortions in an interdependent market may partially counteract the first, and lead to a more efficient outcome. Implications In an economy with some uncorrectable market failure in one sector, actions to correct market failures in another related sector with the intent of increasing economic efficiency may actually decrease overall economic efficiency. In th ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
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