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Contents
6
Preface
12
Introduction
14
1. The Concerns of Welfare Economics
14
2. The Concerns of Social Choice Theory
17
3. Practical Concerns of Welfare Economics and Social Choice Theory
20
Chapter 1 PREFERENCES AND UTILITY
24
1. Fundamental Assumptions
24
2. Best Alternatives and Utility Functions
26
3. The Formal Model of Preferences
27
4. Decisions under Uncertainty and Expected Utility
32
5. Introduction to Social Preferences
37
6. Exercises
41
7. Appendix
42
8. Selected References
43
Chapter 2 BARTER EXCHANGE
46
1. Introduction
46
2. Allocations
47
3. The Edgeworth Box Diagram
49
4. Pareto Optimal Allocations and the Core
50
5. Algebraic Examples
53
6. Final Notes on the Core: The Number of Coahtions
59
7. Exercises
59
8. Selected References
60
Chapter 3 WELFARE PROPERTIES OF MARKET EXCHANGE
64
1. Introduction
64
2. The Two-Person, Two-Goods Model
65
3. Competitive Equilibrium in an Exchange Economy: Formal Preliminaries
69
4. The First Fundamental Theorem of Welfare Economics
72
5. The Second Fundamental Theorem of Welfare Economics
76
6. An Algebraic Example
83
7. Exercises
86
8. Selected References
88
Chapter 4 WELFARE PROPERTIES OF ^'JUNGLE" EXCHANGE
92
1. Power as a Basis for Exchange
92
2. A Model of Indivisible Objects
93
3. A 4-Person 4-Houses Example
95
4. Finding a Market Equilibrium with Top Cycles
98
5. Fundamental Theorems of Welfare Economics and Jungle Economics
100
6. Exercises
104
7. Selected References
104
Chapter 5 ECONOMIES WITH PRODUCTION
106
1. Introduction
106
2. Optimal Production Plans
109
3. Competitive Equilibrium Production Plans
112
4. The First Fundamental Theorem of Welfare Economics, Production Version
115
5. The Second Fundamental Theorem of Welfare Economics, Production Version
117
6. Extending the Production Model, and Combining Production and Exchange
120
7. An Algebraic Example in a Simple Production Model
124
8. Exercises
126
9. Appendix
127
10. Selected References
128
Chapter 6 UNCERTAINTY IN EXCHANGE
132
1. Introduction
132
2. States of the World
133
3. Symmetric Uncertainty
134
4. Examples
141
5. Asymmetric Information
143
6. Exercises
152
7. Selected References
152
Chapter 7 EXTERNALITIES
156
1. Introduction
156
2. Externalities in an Exchange Economy: An Example
159
3. Pigouvian Taxes and Subsidies: The Exchange Example Continued
163
4. Pigouvian Taxes and Subsidies: A Production Example
166
5. Exercises
170
6. Selected References
171
Chapter 8 PUBLIC GOODS
174
1. Introduction
174
2. The Public Goods Model
175
3. The Samuelson Public Good Optimality Condition
177
4. Private Financing of the Public Good and the Free Rider Problem
180
5. The Wicksell-Lindahl Tax Scheme
182
6. Fixed Tax Shares and Majority Voting
187
7. The Demand-Revealing Tax Scheme
189
8. The Groves-Ledyard Tax Scheme
197
9. Exercises
201
10. Selected References
202
Chapter 9 COMPENSATION CRITERIA
208
1. Introduction
208
2. Notational Preliminaries
209
3. The Pareto Criterion
210
4. The Kaldor Criterion
212
5. The Scitovsky Criterion
214
6. The Samuelson Criterion
215
7. Compensation Criteria in Exchange Economies
217
8. Consumer's Surplus — Money Metrics
219
9. Consumers' Surplus - Boadway Paradox
221
10. Quasilinear Utility
223
11. Cost Benefit Analysis with One Good
226
12. Exercises
227
13. Selected References
228
Chapter 10 FAIRNESS AND THE RAWLS CRITERION
230
1. Introduction
230
2. Fairness
231
3. The Rawls Criterion
234
4. Exercises
238
5. Selected References
239
Chapter 11 LIFE AND DEATH CHOICES
242
1. Introduction
242
2. Economic Model — The Money Value of a Life
243
3. A Formal Version of the Economic Model
244
4. The Broome Paradox
247
5. Ex-Ante and Ex-Post
248
6. Problems with Utilitarian Measures of Life/Death Choices
251
7. The Pareto Principle and Extended Pareto Principles
256
8. What's Repugnant About the Repugnant Conclusion?
259
9. Conclusions About Life and Death Choices
260
10. Exercises
261
11. Selected References
261
Chapter 12 MAJORITY VOTING
266
1. Introduction
266
2. The Majority Voting Criterion
267
3. Majority Voting and Single-Peakedness
269
4. Majority Voting and Single-Peakedness: The Multidimensional Case
276
5. Multidimensional Voting — Are the Cycles That Bad?
281
6. Exercises
283
7. Selected References
284
Chapter 13 ARROW'S IMPOSSIBILITY THEOREM
288
1. Introduction
288
2. A Simple Model for Arrow's Impossibility Theorem
289
3. Requirements on the Arrow Social Welfare Function
290
4. Applying the Requirements
293
5. Arrow's Impossibility Theorem
295
6. Relaxing the Universality Requirement
300
7. Reactions to Arrow's Impossibility Theorem
301
8. Another Version of Arrow's Theorem
304
9. Exercises
307
10. Selected References
308
Chapter 14 DOMINANT-STRATEGY IMPLEMENTATION
312
1. Introduction
312
2. Examples of Strategic Manipulation
314
3. The Gibbard-Satterthwaite Impossibility Theorem
318
4. Significance of the Gibbard-Satterthwaite Theorem
325
5. Exercises
327
6. Appendix
329
7. Selected References
330
Chapter 15 NASH IMPLEMENTATION
334
1. Introduction
334
2. An Example
335
3. Maskin Monotonicity
337
4. Maskin's Theorem
339
5. Comments on Maskin's Theorem
345
6. Limitations of Maskin Monotonicity and Approximate Implementation
346
7. Exercises
350
8. Appendix
352
9. Selected References
354
Chapter 16 BAYESIAN IMPLEMENTATION
358
1. Introduction
358
2. Asymmetric Information in the Model of Types
359
3. Incentive Compatibility
363
4. From Truthful to Full Implementability
366
5. Bayesian Implement ability: Example 3 Continued
369
6. Bayesian Implementability: Theory
370
7. Exercises
372
8. Selected References
372
Chapter 17 EPILOGUE
376
Solutions to Exercises
384
Index
412
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