publicsectoreconomics(英文版閱讀講義)

CONTENTS

Chapter1Introduction

1.Publicsector

2.Publicsectoreconomics

3.Marketfailure

4.Governmentfailure

5.Welfareeconomics

Chapter2Externality

1.Implications

2.Supplyanddemanddiagram

3.Types

4.Coasetheorem

Chapter3Publicchoicetheory

1.Originsandformation

2.Perspective

3.Claims

4.Applicationsandwiderrecognition

5.Criticism

Chapter4Publicgoods

1.Terminologyandtypesofpublicgoods

2.Examples

3.Thefreeriderproblem

4.Efficientproductionlevelsofpublicgoods

Chapter5GovernmentRevenue

1.Taxes

2.Debt

3.Seigniorage

Chapter6GovernmentExpenditure

1.Governmentoperations

2.Incomedistribution

3.Transferpayment

4.Governmentefficiency

Chapter7Governmentbudget

1.Budgettheory

2.Budgettypes

3.Budgetsurplus

4.Budgetcrisis

5.Budgetoverrun

6.ChancelloroftheExchequer(UKbudget)

7.UnitedStatesbudgetprocess

8.Governmentfinancialreports

9.Varianceanalysis(accounting)

Chapter1Introduction

Contents:

1.Publicsector

2.Publicsectoreconomics

3.Marketfailure

4.Governmentfailure

5.Welfareeconomics

1.Publicsector

Thepublicsectoristhepartofeconomicandadministrativelifethatdealswiththedelivery

ofgoodsandservicesbyandforthegovernment,whethernational,regionalor

local/municipal.

Examplesofpublicsectoractivityrangefromdeliveringsocialsecurity,administeringurban

planningandorganizingnationaldefenses.

Theorganizationofthepublicsector(publicownership)cantakeseveralforms,including:

Directadministrationfundedthroughtaxation;thedeliveringorganizationgenerallyhasno

specificrequirementtomeetcommercialsuccesscriteria,andproductiondecisionsare

determinedbygovernment.

Publiclyownedcorporations(insomecontexts,especiallymanufacturing,“State-owned

enterprises'1);whichdifferfromdirectadministrationinthattheyhavegreatercommercial

freedomsandareexpectedtooperateaccordingtocommercialcriteria,andproduction

decisionsarenotgenerallytakenbygovernment(althoughgoalsmaybesetforthemby

government).

Partialoutsourcing(ofthescalemanybusinessesdo,e.g.forITservices),isconsidereda

publicsectormodel.

Aborderlineformis

Completeoutsourcingorcontractingout,withaprivatelyownedcorporationdeliveringthe

entireserviceonbehalfofgovernment.Thismaybeconsideredamixtureofprivatesector

operationswithpublicownershipofassets,althoughinsomeformstheprivatesector's

controland/orriskissogreatthattheservicemaynolongerbeconsideredpartofthepublic

sector.

Inspiteoftheirname,publiccompaniesarenotpartofthepublicsector;theyareaparticular

kindofprivatesectorcompanythatcanoffertheirsharesforsaletothegeneralpublic.

Thedecisionaboutwhatarepropermattersforthepublicsectorasopposedtotheprivate

sectorisprobablythesinglemostimportantdividinglineamongsocialist,liberal,

conservative,andlibertarianpoliticalphilosophy,with(broadly)socialistspreferringgreater

stateinvolvement,libertariansfavoringminimalstateinvolvement,andconservativesand

liberalsfavouringstateinvolvementinsomeaspectsofthesocietybutnotothers.

2.Publicsectoreconomics

Publicsectoreconomicsisthestudyofthepubliceconomy,includingthepublicsectorand

itsinfluenceontheeconomyandsociety.Itcoverspublic-financetheoryanditsapplication

topublic-policyissues.Itincludeseconomicissuesbeyondthehousehold,firm,ormarket

withemphasisonanalyticalandscientificmethodsandnormative-ethicalanalysis(Kolm,

1987,p.1047).Examplesoftopicscoveredaretaxincidence,optimaltaxation,thetheoryof

publicgoods,anddesignofpolicy(AtkinsonandStiglitz,1980).

3.Marketfailure

Marketfailureisatermusedbyeconomiststodescribetheconditionwheretheallocationof

goodsandservicesbyamarketisnotefficient.Thefirstknownuseofthetermby

economistswasin1958J1]buttheconcepthasbeentracedbacktotheVictorianphilosopher

HenrySidgwick.[2]Thebeliefthatmarketscanfailisacommonmainstreamjustificationfor

governmentinterventioninfreemarkets.[3]Economists,especiallymicroeconomists,use

manydifferentmodelsandtheoremstoanalyzethecausesofmarketfailure,andpossible

meanstocorrectsuchafailurewhenitoccurs.[4]Suchanalysisplaysanimportantrolein

manytypesofpublicpolicydecisionsandstudies.However,notalleconomistsbelievethat

marketfailuresoccur,orthattheyarecompellingargumentsforgovernmentintervention,

duetogovernmentfailure.[5]

Contents

3.1Causes

3.2Interpretationsandpolicy

3.3Objections

3.4references

3.1Causes

Inmainstreamanalysis,amarketfailure(relativetoParetoefficiency)canoccurforthree

mainreasons.[6]First,anagentinamarketcangainmarketpower,allowingthemtoblock

othermutuallybeneficialgainsfromtradefromoccurring.Thiscanleadtoinefficiencydue

toimperfectcompetition,whichcantakemanydifferentforms,suchasmonopolies,

monopsonies,cartels,ormonopolisticcompetition.Second,theactionsofanagentcanhave

"sideeffects'1knownasexternalities,whichareinnatetothemethodsofproduction,orother

conditionsimportanttothemarket.[6]Finally,somemarketscanfailduetothenatureof

certaingoods,orthenatureoftheirexchange.Forinstance,goodscandisplaytheattributes

ofpublicgoodsorcommon-poolresources,whilemarketsmayhavesignificanttransaction

costs,agencyproblems,orinformationalasymmetry.[6]Ingeneral,allofthesesituationscan

produceinefficiency,andaresultingmarketfailure.

Morefundamentally,theunderlyingcauseofmarketfailureisoftenaproblemofproperty

rights.AsHughGravelleandRayReesputit,

Amarketisaninstitutioninwhichindividualsorfirmsexchangenotjustcommodities,but

therightstousetheminparticularwaysforparticularamountsoftime.[...]Marketsare

institutionswhichorganizetheexchangeofcontrolofcommodities,wherethenatureofthe

controlisdefinedbythepropertyrightsattachedtothecommodities.[3]

Asaresult,anagent'scontrolovertheusesoftheircommoditiescanbeimperfect,because

thesystemofrightswhichdefinesthatcontrolisincomplete.Typically,thisfallsintotwo

generalizedrights-excludabilityandtransferability.Excludabilitydealswiththeabilityof

anagenttocontrolwhousestheircommodity,andforhowlong-andtherelatedcosts

associatedwithdoingso.Transferabilityreflectstherightofanagenttotransfertherightsof

usefromoneagenttoanother,forinstancebysellingorleasingacommodity,andthecosts

associatedwithdoingso.Ifagivensystemofrightsdoesnotfullyguaranteetheseatminimal

(orno)cost,thentheresultingdistributioncanbeinefficient.[3]Considerationssuchasthese

formanimportantpartoftheworkofinstitutionaleconomics.[7]Nonetheless,viewsstill

differonwhethersomethingisdisplayingtheseattributesismeaningfulwithoutthe

informationprovidedbythemarketpricesystem.[8]

3.2Interpretationsandpolicy

Theinterpretationgivenaboveisthemainstreamviewofwhatmarketfailuresmeanandof

theirimportanceintheeconomy.Thisanalysisfollowstheleadoftheneoclassicalschool,

andreliesonthenotionofParetoefficiency[5]-andspecificallyconsidersmarketfailures

absentconsiderationsofthe"publicinterest",orequity,citingdefinitionalconcems[4].This

formofanalysishasalsobeenadoptedbytheKeynesianornewKeynesianschoolsin

modemmacroeconomics,applyingittoWalrasianmodelsofgeneralequilibriuminorderto

dealwithfailurestoattainfullemployment,orthenon-adjustmentofpricesandwages.

Manysocialdemocratsand"NewDealliberals1',haveadoptedthisanalysisforpublicpolicy,

sotheyviewmarketfailuresasaverycommonproblemofanyunregulatedmarketsystem

andthereforeargueforextensivestateinterventionintheeconomyinordertoensureboth

efficiencyandsocialjustice(usuallyinterpretedintermsoflimitingavoidableinequalitiesin

wealthandincome).Boththedemocraticaccountabilityoftheseregulationsandthe

technocraticexpertiseoftheeconomistsplayanimportantrolehereinshapingthekindand

degreeofintervention.Neoliberalsfollowasimilarline,oftenfocusingon"market-oriented

solutions1'tomarketfailure:forexample,theyproposegoingbeyondthecommonideaof

havingthegovernmentchargeafleefortherighttopollute(internalizingtheexternalcost,

creatingadisincentivetopollute)toallowpolluterstosellthepollutionpermits.

3.3Objections

Nonetheless,manyheterodoxschoolsdisagreewiththemainstreamconsensus.Advocatesof

laissez-fairecapitalism,suchaslibertariansandeconomistsoftheAustrianSchool,arguethat

thereisnosuchphenomenaas"marketfailures,"althoughthenotionsofmarketefficiency

andperfectcompetitioncanberedefinedastoincludetheanalyticalframeworkofthe

AustrianSchool(praxeology).IsraelKirznerstates:

Efficiencyforasocialsystemmeanstheefficiencywithwhichitpermitsitsindividual

memberstoachievetheirindividualgoals,[9]

TheAustriananalysisfocusesontheactionsthatindividualsmake,astoattaintheirgoalsor

needs;ineificiencyariseswhenmeansarechosenthatareinconsistentwithdesiredgoals.[10]

ThisdefinitionofefficiencydiffersfromthatofParetoefficiency,andformsthebasisofthe

theoreticalargumentagainsttheexistenceofmarketfailures.However,providingthatthe

conditionsofthefirstwelfaretheoremaremet,thesetwodefinitionsagree,andgiveidentical

results.

ThemainobjectionthatAustrianshaveagainsttheconceptofmarketfailureisthatitisa

conceptbuildonstaticequilibriummodelsthatareconceivedasapproximationstoreality,

andthesemodelsarethencomparedtoreality,andwhenrealitydiffersfromtheresultsofan

Paretooptimalitymodelitisconsideredamarketfailure.HowevertheAustriansarguethat

theseequilibriumsituationsareonlyhypotheticalconstructsthatdon'texistinrealitybecause

oftheincessantchangesofthestateofthemarketthatmakesimpossibletheestablishmentof

equilibrium.IneffectAustriansarguethatthemarketalwaystendstoeliminateitsfailures

throughthecontinuousmarketprocessofentrepreneurdiscoverythatisbroughtbytheprofit

motive,failuresthattheStatecannotevendetermine,muchlesscorrect.

Inaddition,economistssuchasMiltonFriedman,oftenfromthePublicChoiceschool,argue

thatmarketfailuredoesnotnecessarilyimplythatgovernmentshouldattempttosolve

marketfailures,becausethecostsofgovernmentfailuremightbeworsethanthoseofthe

marketfailureitattemptstofix.Thisfailureofgovernmentisseenastheresultofthe

inherentproblemsofdemocracyperceivedbythisschoolandalsoofthepowerof

special-interestgroups(rentseekers)bothintheprivatesectorandinthegovernment

bureaucracy.Conditionsthatmanywouldregardasnegativeareoftenseenasaneffectof

subversionofthefreemarketbycoercivegovernmentintervention.

Finally,objectionsalsoexistonmorefundamentalbases,suchasthatofequity,orMarxian

analysis.Colloquialusesoftheterm"marketfailure'1reflectthenotionofamarket"failing”

toprovidesomedesiredattributedifferentfromefficiency-forinstance,highlevelsof

inequalitycanbeconsidereda"marketfailure1*,yetarenotParetoinefficient,andsowould

notbeconsideredamarketfailurebymainstreameconomics.[6]Inaddition,manyMarxian

economistswouldarguethatthesystemofindividualpropertyrightsisafundamental

probleminitself,andthatresourcesshouldbeallocatedinanotherwayentirely.Thisis

differentfromconceptsof"marketfailure'1whichfocusesonspecificsituations-typically

seenas'Abnormal"-wheremarketshaveinefficientoutcomes.Marxists,incontrast,would

saythatallmarketshaveinefficientanddemocratically-unwantedoutcomes-viewing

marketfailureasaninherentfeatureofanycapitalisteconomy-andtypicallyomititfrom

discussion,preferringtofocusonwhattheybelievetobemorefundamentalconsiderations

suchasclassstruggleortheprocessofcomodification.

3.4References

1.Bator,FrancisM.(August1958).'TheAnatomyofMarketFailure11.TheQuarterlyJournal

of氏onomics72(3):351-379.

2.Medema,StevenG(July2004).Mill,Sidgwick,andtheEvolutionoftheTheoryof

MarketFailure(OnlineWorkingPaper).Retrievedon23/06/2007.

3.abcGravelie,Hugh;RayRees(2004).Microeconomics.Essex,England:PrenticeHall,

FinancialTimes,314-346.

4.abMankiw,Gregory;RonaldKneebone,KennethMcKenzie,NicholasRow(2002).

PrinciplesofMicroeconomics:SecondCanadianEdition.UnitedStates:Thomson-Nelson,

157-158.

5.abMacKenzie,D.W.(2002-08-26).TheMarketFailureMyth.LudwigvonMisesInstitute.

Retrievedon2007-05-30.

6.abcdKrugman,Paul;RobinWells,AnthonyMyatt(2006).Microeconomics:Canadian

Edition.WorthPublishers,160-162.

7.Bowles,Samuel(2004).Microeconomics:Behavior,Institutions,andEvolution.United

States:RusselSageFoundation.

8.Machan,R.Tibor,SomeSkepticalReflectionsonResearchandDevelopment,Hoover

Press

9.IsraelKirzner(1963).MarketTheoryandthePriceSystem.Princeton.N.J.:D.Van

NostrandCompany,35.

10.RoyE.Cordato(1980)."TheAustrianTheoryofEfficiencyandtheRoleofGovernment”.

TheJournalofLibertarianStudies4(4):393-403.

4.Governmentfailure

Governmentfailure(ornon-marketfailure)isthepublicsectoranalogytomarketfailureand

occurswhenagovernmentinterventioncausesamoreinefficientallocationofgoodsand

resourcesthanwouldoccurwithoutthatintervention.Justaswithmarketfailures,thereare

manydifferentkindsofgovernmentfailures.However,whilemarketfailurehasbeenwidely

studied,governmentfailurehasonlyrecentlycomeintocommonusageasthelensesof

PublicchoicetheoryandNewInstitutionalEconomics(NIE)orTransactionCostEconomics

(TCE)havebeguntoexploretheproblems.Justasamarketfailureisnotafailuretobringa

particularorfavoredsolutionintoexistenceatdesiredprices,butisratheraproblemwhich

preventsthemarketfromoperatingefficiently,agovernmentfailureisnotafailureofthe

governmenttobringaboutaparticularsolution,butisratherasystemicproblemwhich

preventsanefficientgovernmentsolutiontoaproblem.Theproblemtobesolvedneednotbe

amarketfailure;manysolutionspotentiallysolvablebygovernmentmeansarepreferredto

viablemarketsolutionsbysubsetsofvoters.

Contents

4.1Problems

4.1.1Legislative

4.1.2Regulatory

4.1.3Informationassessment

4.2References

4.1Problems

4.1.1Legislative

Crowdingout-Crowdingoutoccurswhenthegovernmentexpandsitsborrowingmoreto

financeincreasedexpenditureortaxcutsinexcessofrevenuecrowdingoutprivatesector

investmentbywayofhigherinterestrates.Governmentspendingisalsosaidtocrowdout

privatespending.

Logrolling-Theprocessbywhichlegislatorstradevotes

Porkbarrelspending-Thetendencybylegislatorstoencouragegovernmentspendingin

theirownconstituencies,whetherornotitisefficientorevenuseful.Seniorlegislators,with

greaterstatusandabilityto''bringhomethebaconmaybereelectedforthisreason,evenif

theirpolicyviewsareatoddswiththeirconstituency.

Rationalignorance-becausetherearemonetaryandtimecostsassociatedwithgathering

information,andthebenefitstodoingsoislimited,voterswillnotnecessarilyobtainallof

theinformationnecessarytomakeaninformeddecisiononasubjectonwhichtheymay

nonethelesscastavote.Thisisastrueforlegislatorsasforprivatecitizens.

Rentseeking-Thetendencybyinterestgroupstolobbyforlawsandregulationsthat

providethemaguaranteedbenefit(rent).Therearethreemainclassesofrent-seekers:

legislators,administrators,andregulatedentities.Legislatorswilltrytochangelawsto

ensuretheircontinuedincumbency,suchasgerrymandering.Administrators(bureaucrats)

mayseektoadvancetheirpowerandbudgetauthority.Regulatedentitiesmayseektoobtain

barrierstoentryorotherspecialprovisionsofthelawthatreducecompetition,increase

subsidization,orboth.

Shorttimehorizons-Thetendencytofixateonshorttermfixesandtoignorelarge,

complexproblems.Thismaybedriventotheelectioncycle.

Licensingandpermits-Highcostsofobtainingalicenseorpermitfromgovernmentto

practiceanactivitybeneficialtosociety,suchaspracticingmedicineorstartingabusiness,

canreducetheavailabilityofcertaingoodsandservices.

Taxes-hightaxescanreduce,halt,orreverseeconomicexpansion

Subsidies-governmentsubsidiesprovidedtoparticularbusinessesorindustries.

4.1.2Regulatory

Regulatoryarbitrage-Regulatoryarbitrageiswherearegulatedinstitutiontakesadvantage

ofthedifferencebetweenitsreal(oreconomic)riskandtheregulatoryposition.

Regulatorycapture-Theco-optingofregulatoryagenciesbymembersofortheentire

regulatedindustry.Rentseekingandrationalignorancearetwoofthemechanismswhich

allowthistohappen.

Regulatoryfailure-Whenregulationgeneratesmoreeconomiccoststhanbenefits.

Regulatoryrisk-Ariskfacedbyprivate-sectorfirmsthatregulatorychangeswillhurttheir

business.

Rentseeking-seeabove.

4.1.3Informationassessment

Environmentalimpact-Publicsupportforroadslowersthecostofoperatingavehicle;

farmsubsidiesandprogramsliketheSoilConservationprogramencouragefarmerstouse

fieldswhichrequiremoreintenseapplicationoffertilizerandirrigation.Bothofthesehave

anadverseimpactontheenvironment.

Imperfectinformation-EspeciallyinPigouvianapplication,gatheringsufficient

informationisnoeasierfortheregulatoryagencythanforindividualactors

Marketdistortion

(l)Bytaxstructures-byorganizingtaxationinaparticularway,investmentsmaybedirected

soastoavoidthosetaxeseventhoughtheinvestmentsareinferior

(2)Byregulatoryordering-mandatingaparticularsolutionmayprohibitallothersolutions,

someofwhichmaybesuperior

(3)Bysubsidization-bysubsidizingparticulargoods,thesemayforceother,nonsubsidized,

butsuperiorsubstitutesfromthemarket

(4)Riskassumption-bypromisingtorelieverisk-takers,thegovernmentencourages

risk-takingwhosebenefitsaccruetoaminoritywhilespreadingtheassumptionofthatrisk

acrossthepopulace.TheSavingsandLoancrisisofthe1980sisoneexample;federal

assumptionofresponsibilityfortheMississippiRiverleveesystem,disasterrelief,andEffect

ofHurricaneKatrinaonNewOrleansisanother.

Unintendedconsequence-Anunintendedconsequencecomesaboutwhenamechanism

thathasbeeninstalledwiththeintentionofproducingoneresultisusedtoproducea

different(andoftenconflicting)result,(e.g.rentcontrolleadstoshortagesinhousing)

4.2References

1.Grier,RobinM.andGrier,KevinB.?'Politicalcyclesinnontraditionalsettings:theoryand

evidencefromthecaseofMexico",JLEvol.XLIII(April2000),p.239

2.Kolko,Gabriel(1977),TheTriumphofConservatism,TheFreePress,ISBN

0-02-916650-0

3.Kolko,Gabriel(1977),RailroadsandRegulation,1877-1916,GreenwoodPublishing

Company,ISBN0-8371-8885-7

4.Niskanen,William(1967),Thepeculiareconomicsofbureaucracy,InstituteforDefense

Analyses,ProgramAnalysisDivision(1967),ASINB0007H5TBG

5.Niskanen,William(1971),BureaucracyandRepresentativeGovernment,Aldine,Atherton,

ISBN0-202-06040-3

5.Welfareeconomics

Contents

5.1Twoapproaches

5.2Efficiency

5.3Incomedistribution

5.4Asimplifiedsevenequationmodel

5.5Efficiencybetweenproductionandconsumption

5.6Socialwelfaremaximization

5.7Welfareeconomicsinrelationtoothersubjects

5.8ParetianWelfareEconomics

5.9Criticisms

5.10References

Welfareeconomicsisabranchofeconomicsthatusesmicroeconomictechniquesto

simultaneouslydetermineallocativeefficiencywithinaneconomyandtheincome

distributionassociatedwithit.Itanalyzessocialwelfare,howevermeasured,intermsof

economicactivitiesoftheindividualsthatcomprisethetheoreticalsocietyconsidered.As

such,individuals,withassociatedeconomicactivities,arethebasicunitsforaggregatingto

socialwelfare,whetherofagroup,acommunity,orasociety,andthereisno"socialwelfare"

apartfromthe"welfare"associatedwithitsindividualunits.Here,'welfare'initsmost

generalsensereferstowell-being.

Welfareeconomicstypicallytakesindividualpreferencesasgivenandstipulatesawelfare

improvementinParetoefficiencytermsfromsocialstateAtosocialstateBifatleastone

personprefersBandnooneelseopposesit.Thereisnorequirementofauniquequantitative

measureofthewelfareimprovementimpliedbythis.Anotheraspectofwelfaretreats

income/goodsdistribution,includingequality,asafurtherdimensionofwelfare.fl]

Socialwelfarereferstotheoverallwelfareofsociety.Withsufficientlystrongassumptions,it

canbespecifiedasthesummationofthewelfareofalltheindividualsinthesociety.Welfare

maybemeasuredeithercardinallyintermsof"utils"ordollars,ormeasuredordinallyin

termsofParetoefficiency.Thecardinalmethodin"utils'*isseldomusedinpuretheorytoday

becauseofaggregationproblemsthatmakethemeaningofthemethoddoubtful,excepton

widelychallengedunderlyingassumptions.Inappliedwelfareeconomics,suchasin

cost-benefitanalysis,money-valueestimatesareoftenused,particularlywhere

ineome-distributioneffectsarefactoredintotheanalysisorseemunlikelytoundercutthe

analysis.

Therearetwosidestowelfareeconomics:economicefficiencyandincomedistribution.

Economicefficiencyislargelypositiveanddealswiththe*'sizeofthepie".Income

distributionismuchmorenormativeanddealswith"dividingupthepie”.

5.1Twoapproaches

Therearetwoapproachesthatcanbetakentowelfareeconomics:theearlyNeoclassical

approachandtheNewwelfareeconomicsapproach.

TheearlyNeoclassicalapproachwasdevelopedbyEdgeworth,Sidgwick,Marshall,and

Pigou.Itassumesthat:

Utilityiscardinal,thatis,scale-measurablebyobservationorjudgment.

Preferenceisexogenouslygivenandstable.

Additionalconsumptionprovidessmallerandsmallerincreasesinutility(diminishing

marginalutility).

Allindividualshaveinterpersonallycomparableutilityfunctions(anassumptionthat

EdgeworthavoidedinhisMathematical'Psychics).

Withtheseassumptions,itispossibletoconstructasocialwelfarefunctionsimplyby

summingalltheindividualutilityfunctions.

TheNewWelfareEconomicsapproachisbasedontheworkofPareto,Hicks,andKaldor.

Itexplicitlyrecognizesthedifferencesbetweentheefficiencypartofthedisciplineandthe

distributionpartandtreatsthemdifferently.Questionsofefficiencyareassessedwithcriteria

suchasParetoefficiencyandtheKaldor-Hickscompensationtests,whilequestionsof

incomedistributionarecoveredinsocialwelfarefunctionspecification.Further,efficiency

dispenseswithcardinalmeasuresofutility:ordinalutility,whichmerelyrankscommodity

bundles,suchasrepresentedbyanindifference-curvemapisadequateforthisanalysis.

5.2Efficiency

Situationsareconsideredtohavedistributiveefficiencywhengoodsaredistributedtothe

peoplewhocangainthemostutilityfromthem.

ManyeconomistsuseParetoefficiencyastheirefficiencygoal.Accordingtothismeasureof

socialwelfare,asituationisoptimalonlyifnoindividualscanbemadebetteroffwithout

makingsomeoneelseworseoff.

Thisidealstateofaffairscanonlycomeaboutiffourcriteriaaremet:

Themarginalratesofsubstitutioninconsumptionareidenticalforallconsumers.Thisoccurs

whennoconsumercanbemadebetteroffwithoutmakingothersworseoff.

Themarginalrateoftransformationinproductionisidenticalforallproducts.Thisoccurs

whenitisimpossibletoincreasetheproductionofanygoodwithoutreducingtheproduction

ofothergoods.

Themarginalresourcecostisequaltothemarginalrevenueproductforallproduction

processes.Thistakesplacewhenmarginalphysicalproductofafactormustbethesamefor

allfirmsproducingagood.

Themarginalratesofsubstitutioninconsumptionareequaltothemarginalratesof

transformationinproduction,suchaswhereproductionprocessesmustmatchconsumer

wants.

Thereareanumberofconditionsthat,mosteconomistsagree,mayleadtoinefficiency.They

include:

Imperfectmarketstructures,suchasamonopoly,monopsony,oligopoly,oligopsony,and

monopolisticcompetition.

Factorallocationinefficienciesinproductiontheorybasics.

Marketfailuresandexternalities;thereisalsosocialcost.

Pricediscriminationandpriceskimming.

Asymmetricinformation,principle-agentproblems.

Longrundecliningaveragecostsinanaturalmonopoly.

Certaintypesoftaxesandtariffs.

TodeterminewhetheranactivityismovingtheeconomytowardsParetoefficiency,two

compensationtestshavebeendeveloped.Anychangeusuallymakessomepeoplebetteroff

whilemakingothersworseoff,sothesetestsaskwhatwouldhappenifthewinnerswereto

compensatethelosers.UsingtheKaldorcriterion,anactivitywillcontributetoPareto

optimalityifthemaximumamountthegainersarepreparedtopayisgreaterthanthe

minimumamountthatthelosersarepreparedtoaccept.UndertheHickscriterion,anactivity

willcontributetoParetooptimalityifthemaximumamountthelosersarepreparedtoofferto

thegainersinordertopreventthechangeislessthantheminimumamountthegainersare

preparedtoacceptasabribetoforgothechange.TheHickscompensationtestisfromthe

losers'pointofview,whiletheKaldorcompensationtestisfromthegainers1pointofview.If

bothconditionsaresatisfied,bothgainersandloserswillagreethattheproposedactivitywill

movetheeconomytowardParetooptimality.ThisisreferredtoasKaldor-Hicksefficiencyor

theScitovskycriterion.

5.3Incomedistribution

Therearemanycombinationsofconsumerutility,productionmixes,andfactorinput