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Social Planner
In welfare economics, a social planner is a hypothetical decision-maker who attempts to maximize some notion of social welfare. The planner is a fictional entity who chooses allocations for every agent in the economy—for example, levels of consumption and leisure—that maximize a social welfare function subject to certain constraints (e.g., a physical resource constraint, or incentive compatibility constraints). This so-called planner's problem is a mathematical constrained optimization problem. Solving the planner's problem for all possible Pareto weights (i.e., weights on each type of agent in the economy) yields all Pareto efficient allocations. Connection with the fundamental welfare theorems Any Pareto efficient allocation is a solution to a planner's problem. However, the planner is a purely fictional entity; solving the planner's problem requires knowledge of consumers' preferences and all physical resource constraints in the economy. Thus, a natural question is whethe ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Welfare Economics
Welfare economics is a field of economics that applies microeconomic techniques to evaluate the overall well-being (welfare) of a society. The principles of welfare economics are often used to inform public economics, which focuses on the ways in which government intervention can improve social welfare. Additionally, welfare economics serves as the theoretical foundation for several instruments of public economics, such as cost–benefit analysis. The intersection of welfare economics and behavioral economics has given rise to the subfield of behavioral welfare economics. Two fundamental theorems are associated with welfare economics. The first states that competitive markets, under certain assumptions, lead to Pareto efficient outcomes. This idea is sometimes referred to as Adam Smith's invisible hand. The second theorem states that with further restrictions, any Pareto efficient outcome can be achieved through a competitive market equilibrium, provided that a social ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Social Welfare Function
In welfare economics and social choice theory, a social welfare function—also called a social ordering, ranking, utility, or choice function—is a function that ranks a set of social states by their desirability. Each person's preferences are combined in some way to determine which outcome is considered better by society as a whole. It can be seen as mathematically formalizing Rousseau's idea of a general will. Social choice functions are studied by economists as a way to identify socially-optimal decisions, giving a procedure to rigorously define which of two outcomes should be considered better for society as a whole (e.g. to compare two different possible income distributions). They are also used by democratic governments to choose between several options in elections, based on the preferences of voters; in this context, a social choice function is typically referred to as an electoral system. The notion of social utility is analogous to the notion of a utility fu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Incentive Compatibility
In game theory and economics, a mechanism is called incentive-compatible (IC) if every participant can achieve their own best outcome by reporting their true preferences. For example, there is incentive compatibility if high-risk clients are better off in identifying themselves as high-risk to insurance firms, who only sell discounted insurance to high-risk clients. Likewise, they would be worse off if they pretend to be low-risk. Low-risk clients who pretend to be high-risk would also be worse off. The concept is attributed to the Russian-born American economist Leonid Hurwicz. Typology There are several different degrees of incentive-compatibility: * The stronger degree is dominant-strategy incentive-compatibility (DSIC). This means that truth-telling is a weakly-dominant strategy, i.e. you fare best or at least not worse by being truthful, regardless of what the others do. In a DSIC mechanism, strategic considerations cannot help any agent achieve better outcomes than the tru ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Constrained Optimization
In mathematical optimization, constrained optimization (in some contexts called constraint optimization) is the process of optimizing an objective function with respect to some variables in the presence of constraints on those variables. The objective function is either a cost function or energy function, which is to be minimized, or a reward function or utility function, which is to be maximized. Constraints can be either hard constraints, which set conditions for the variables that are required to be satisfied, or soft constraints, which have some variable values that are penalized in the objective function if, and based on the extent that, the conditions on the variables are not satisfied. Relation to constraint-satisfaction problems The constrained-optimization problem (COP) is a significant generalization of the classic constraint-satisfaction problem (CSP) model. COP is a CSP that includes an ''objective function'' to be optimized. Many algorithms are used to hand ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Pareto Efficiency
In welfare economics, a Pareto improvement formalizes the idea of an outcome being "better in every possible way". A change is called a Pareto improvement if it leaves at least one person in society better off without leaving anyone else worse off than they were before. A situation is called Pareto efficient or Pareto optimal if all possible Pareto improvements have already been made; in other words, there are no longer any ways left to make one person better off without making some other person worse-off. In social choice theory, the same concept is sometimes called the unanimity principle, which says that if ''everyone'' in a society (strict inequality, non-strictly) prefers A to B, society as a whole also non-strictly prefers A to B. The Pareto frontier, Pareto front consists of all Pareto-efficient situations. In addition to the context of efficiency in ''allocation'', the concept of Pareto efficiency also arises in the context of productive efficiency, ''efficiency in prod ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Fundamental Theorems Of Welfare Economics
There are two fundamental theorems of welfare economics. The first states that in economic equilibrium, a set of complete markets, with complete information, and in perfect competition, will be Pareto optimal (in the sense that no further exchange would make one person better off without making another worse off). The requirements for perfect competition are these: # There are no externalities and each actor has perfect information. # Firms and consumers take prices as given (no economic actor or group of actors has market power). The theorem is sometimes seen as an analytical confirmation of Adam Smith's "invisible hand" principle, namely that ''competitive markets ensure an efficient allocation of resources''. However, there is no guarantee that the Pareto optimal market outcome is equitative, as there are many possible Pareto efficient allocations of resources differing in their desirability (e.g. one person may own everything and everyone else nothing). The second theorem s ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Externality
In economics, an externality is an Indirect costs, indirect cost (external cost) or indirect benefit (external benefit) to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced components that are involved in either consumer or producer consumption. Air pollution from motor vehicles is one example. The Air pollution#Health effects, cost of air pollution to society is not paid by either the producers or users of motorized transport. Water pollution from mills and factories are another example. All (water) consumers are made worse off by pollution but are not compensated by the market for this damage. The concept of externality was first developed by Alfred Marshall in the 1890s and achieved broader attention in the works of economist Arthur Cecil Pigou, Arthur Pigou in the 1920s. The prototypical example of a negative externality is environmental pollution. Pigou argued that a tax, equal to the m ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Competitive Equilibrium
Competitive equilibrium (also called: Walrasian equilibrium) is a concept of economic equilibrium, introduced by Kenneth Arrow and Gérard Debreu in 1951, appropriate for the analysis of commodity markets with flexible prices and many traders, and serving as the benchmark of efficiency in economic analysis. It relies crucially on the assumption of a competitive environment where each trader decides upon a quantity that is so small compared to the total quantity traded in the market that their individual transactions have no influence on the prices. Competitive markets are an ideal standard by which other market structures are evaluated. Definitions A competitive equilibrium (CE) consists of two elements: * A price function P. It takes as argument a vector representing a bundle of commodities, and returns a positive real number that represents its price. Usually the price function is linear - it is represented as a vector of prices, a price for each commodity type. * An allocation ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Social Welfare Function
In welfare economics and social choice theory, a social welfare function—also called a social ordering, ranking, utility, or choice function—is a function that ranks a set of social states by their desirability. Each person's preferences are combined in some way to determine which outcome is considered better by society as a whole. It can be seen as mathematically formalizing Rousseau's idea of a general will. Social choice functions are studied by economists as a way to identify socially-optimal decisions, giving a procedure to rigorously define which of two outcomes should be considered better for society as a whole (e.g. to compare two different possible income distributions). They are also used by democratic governments to choose between several options in elections, based on the preferences of voters; in this context, a social choice function is typically referred to as an electoral system. The notion of social utility is analogous to the notion of a utility fu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Welfare Economics
Welfare economics is a field of economics that applies microeconomic techniques to evaluate the overall well-being (welfare) of a society. The principles of welfare economics are often used to inform public economics, which focuses on the ways in which government intervention can improve social welfare. Additionally, welfare economics serves as the theoretical foundation for several instruments of public economics, such as cost–benefit analysis. The intersection of welfare economics and behavioral economics has given rise to the subfield of behavioral welfare economics. Two fundamental theorems are associated with welfare economics. The first states that competitive markets, under certain assumptions, lead to Pareto efficient outcomes. This idea is sometimes referred to as Adam Smith's invisible hand. The second theorem states that with further restrictions, any Pareto efficient outcome can be achieved through a competitive market equilibrium, provided that a social ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Constrained Optimization
In mathematical optimization, constrained optimization (in some contexts called constraint optimization) is the process of optimizing an objective function with respect to some variables in the presence of constraints on those variables. The objective function is either a cost function or energy function, which is to be minimized, or a reward function or utility function, which is to be maximized. Constraints can be either hard constraints, which set conditions for the variables that are required to be satisfied, or soft constraints, which have some variable values that are penalized in the objective function if, and based on the extent that, the conditions on the variables are not satisfied. Relation to constraint-satisfaction problems The constrained-optimization problem (COP) is a significant generalization of the classic constraint-satisfaction problem (CSP) model. COP is a CSP that includes an ''objective function'' to be optimized. Many algorithms are used to hand ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
