1. Consider 2 policies: A) The government requires everyone to buy a standard he
ID: 1140117 • Letter: 1
Question
1. Consider 2 policies: A) The government requires everyone to buy a standard health insurance package that costs $5000; B) The government taxes everybody $5000 but cuts taxes by $5000 for everybody who buys the standard health insurance package. Do these policies have different effects on the size of government? Explain why.
2. Show graphically and explain why Pareto optimality occurs at a commodity distribution bundle between 2 agents where the marginal rates of substitution between the goods for both agents are equal.
3. Is it feasible for a non-Pareto efficient commodity allocation to create greater societal welfare than does an alternate Pareto efficient commodity allocation? Explain why it is or isn’t. You might find it useful to employ graphical analysis in your answer.
4. Show graphically and explain why the private provision of a public good will not result in an allocatively efficient outcome. As part of your answer you must provide a full explanation of what allocative efficiency is and from where it derives.
5. Show graphically and explain why the private market provision of a good that carries with it a negative externality creates a societal welfare loss.
PLEASE ANSWER QUESTION NUMBER 3.
Explanation / Answer
Pareto's efficiency is defined as the economic situation or condition when the circumstances of one individual cannot be made better without making the situation worse for another individual. It means the economy is at a juncture of optimality. It also emphasizes the efficient, proper and meaningful utilization and distribution of available resources.
Now, as the Italian economist Vilfredo Pareto said that if a change in the economic condition makes at least a single individual better off without making any one worse off, then the change is for the gross betterment of social welfare, and the change is desirable.
On the other hand, if a change makes nobody better off and at least one worse off, implying that the change will make the society worse off, then, from the point of view of welfare, the initial economic state is Pareto-optimal.
When the non-Pareto efficient commodity allocation is concerned, it is a scenario of making people better off without making others worse off. This may include social sector investment or allocation of resources by government where money is disbursed or residents are subsidised based on measurable parameters. This process creates inclusion and overall betterment of society without distorting socio-economic balance. This has an aim to target the have nots to be included in the developmental path.
For Pareto efficient commodity (the supply of agricultural goods where total volume is unchanged or rationing natural resources), one section may alsways be worsened creating better equality but that includes interfering engagement of government for controlling market.
In this context, non-Pareto efficient commodity allocation to create greater societal welfare due to:
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