# Welfare Economics and Social Choice Theory (2nd Edition)

## Allan M. Feldman, Roberto Serrano

Language: English

Pages: 412

ISBN: 1441939881

Format: PDF / Kindle (mobi) / ePub

Welfare economics, and social choice theory, are disciplines that blend economics, ethics, political science, and mathematics. Topics in "Welfare Economics and Social Choice Theory, 2nd Edition", include models of economic exchange and production, uncertainty, optimality, public goods, social improvement criteria, life and death choices, majority voting, Arrow's theorem, and theories of implementation and mechanism design. Our goal is to make value judgments about economic and political mechanisms: for instance, does the competitive market produce distributions of products and services that are good or bad for society? Does majority voting produce good or bad outcomes? How can we design tax mechanisms that result in efficient amounts of public goods being produced? We have attempted, in this book, to minimize mathematical obstacles, and to make this field accessible to undergraduate and graduate students and the interested non-expert.

**Reviews:**

The book, WELFARE ECONOMICS AND SOCIAL CHOICE THEORY, 2nd Edition, by Allan M. Feldman and Roberto Serrano, is an admirable compact distillation of these subjects. What is remarkable is the full and careful presentation of the major results in these areas in a very elementary way, using only very simple mathematical tools with no loss of rigor in the results."

Kenneth J. Arrow, Stanford University

"You've done a beautiful job of covering the modern territory in the new version of WELFARE ECONOMICS AND SOCIAL CHOICE THEORY, 2nd Edition. Congratulations!"

Eric Maskin, Institute for Advanced Study

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persistent inflation which hides price declines. But even if all absolute prices are rising, the goods for which there are surpluses will fall in price relative to other goods. And, only relative prices m a t t e r in our exchange economy model, since doubling all prices has no real effect on any consumer's budget equation.) When there are surpluses, sellers have unplanned and unwanted inventories, so they have "special sales." Buyers see extra stocks of merchandise, so they t r y to bargain with

of plausibility, of jungle exchange. Firstly, we do not intend to claim t h a t there is more forcible taking in tropical rain forests t h a n in New York City. The economic jungle is not a geographic locality. Secondly, we do not intend to claim t h a t taking things based purely on power is pervasive, or even common, in everyday economic activity. Thankfully, it is not. But, thirdly, there are examples where the model might apply: in times of war, in some despotic states, and even,

the distribution t h a t assigns all three pickup trucks to man 1. But this is awful for men 2 and 3. So the theorem t h a t says a competitive economy guarantees a Pareto optimal outcome is fine so far as it goes — but it might not go far enough. There are too many Pareto optima, some of them palatable and some not. This observation, t h a t the market mechanisms might produce a good (Pareto optimal) result, but not the very best result, motivates the second basic theorem of welfare economics.

economics link competition and optimality. But neither one answers these questions: How should we choose among Pareto optimal situations? How do we distinguish among the good? Or, in general, under what circumstances is it reasonable to say t h a t alternative A is better for society t h a n alternative B? The most important results in welfare economics indicate t h a t competitive market mechanisms are good in the sense t h a t they are Pareto optimal. The most important results in social choice

slope equal to 1, in absolute value, then the firms choose the tangency points yi and ^2 shown. Formally, firm 1 wants to maximize p - yi = yu + yii subject to the constraint yu < yj—yw- The solution to this maximization problem is 2/11 2/12 = 1 "4 2- These are the coordinates of y\ in Figure 7.2. W i t h y\ = (—1/4,1/2), firm I's profit i s p - y i = 1/4. Firm 2 wants to maximize p-y2 = 2/22 +2/21 subject to the constraint 2/22 < V-2/21 - 2^12 = V-2/21 - EXTERNALITIES 155 The solution to