Exam 15: The Invisible Hand and the First Welfare Theorem

Absent any violations of the conditions underlying the first welfare theorem, the competitive market equilibrium is efficient if and only if tastes are quasilinear.

If consumers within an industry cannot be represented by as single representative consumer, then the industry equilibrium does not occur where market demand intersects market supply.

If a group of individual consumers can be treated as a single representative consumer, then the aggregate consumer surplus of the group can be measured along the market demand curve.

In a 2-good model, suppose that all individuals have tastes that are quasilinear in either good 1 or in good 2 (with some of each represented in the group.) The quasilinearity of everyone's tastes is then sufficient to insure that we can treat the group as if it were a single representative consumer.

Suppose the conditions of the first welfare theorem hold.If the government redistributes income prior to production and trade occurring, the market outcome (resulting from production and trade) will be the same as it would have been had the government not redistributed income (so long as redistribution does not produce deadweight losses).

"Any social planner who implements efficient outcomes will produce the same output in a given market as the competitive market would." In addition to the conditions of the first welfare theorem, which of the following have to hold in order for the statement in quotes to be true?

Both successful market-processes ​and central planning rely on self-interested behavior.

If consumer tastes are quasilinear -- and ignoring the possibility of corner solutions and violations of the conditions of the first welfare theorem, the competitive market production level of the quasilinear good will be the same as that chosen by a social planner whose goal includes (but is not necessarily limited to) efficiency.

Aggregate producer surplus in an industry is measured along the market supply curve is and only if firm production technologies exhibit the quasilinearity property.

Suppose all individuals in a group have homothetic tastes.Then we can be sure that the group can be treated as a single representative consumer is if the group members also have identical tastes.

Explain how prices in a competitive market form --- and how they take the place of almost limitless information that a social planner would need if he tried to mimic the market outcome.

Suppose the conditions of the first welfare theorem hold.If the government redistributes income prior to production and trade occurring, the market outcome (resulting from production and trade) will be efficient so long as no deadweight loss is produced in the levying of redistributive taxation.

Aggregate producer surplus in an industry can be measured along the market supply curve in the short run but not in the long run.

Absent any violations of the first welfare theorem, the competitive market production level of a good will be the same as that chosen by a social planner whose goal includes (but is not necessarily limited to) efficiency.

The First Welfare Theorem states that, invariably, a competitive market results in an efficient allocation of resources and thus maximizes social surplus.

Absent any violations of the first welfare theorem, the competitive equilibrium is efficient.

How would you contrast the interactions within a small family to those in the market place? In what way could you argue that the ways in which interactions are governed in the family can never work in a larger market setting -- just as the ways in which interactions are structured in market settings can never work well in families?

If the individuals in a group of consumers all have homothetic tastes, then we can treat the group as a single representative consumer.

Which of the following is not a condition required for the first welfare theorem to hold:

Worker surplus can be measured as an area on the market labor supply curve if worker tastes are quasilinear in leisure.