EC370 Chapter Notes - Chapter 32: Pareto Efficiency, Shortage, Competitive Equilibrium
Document Summary
Total amount of goods is fixed each co(cid:374)su(cid:373)er starts with a(cid:374) (cid:862)e(cid:374)dow(cid:373)e(cid:374)t(cid:863) that is the total a(cid:373)ou(cid:374)t of goods they get. Pareto improving area between the two curves. Pareto improving allocation improving the welfare of one without taking away from the other. Contract curve set of all pareto optimal allocations. If there are well behaved preferences, then trading in a perfectly competitive market will always result in a pareto optimal allocation. Second fundamental theorem of welfare economics: any pareto optimal allocation can be attained by a competitive equilibrium, if endowments are first appropriately rearranged amongst the consumers. In the case of two goods, walras law implies that if one market clears (x1) then the other must clear as well.
