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Long run declining average costs in a natural monopoly. Certain types of taxes and tariffs. To determine whether an activity is moving the economy towards Pareto efficiency, two compensation tests have been developed.
Any change usually makes some people better off while making others worse off, so these tests ask what would happen if the winners were to compensate the losers.
Using the Kaldor criterion, an activity will contribute to Pareto optimality if the maximum amount the gainers are prepared to pay is greater than the minimum amount that the losers are prepared to accept. Under the Hicks criterion, an activity will contribute to Pareto optimality if the maximum amount the losers are prepared to offer to the gainers in order to prevent the change is less than the minimum amount the gainers are prepared to accept as a bribe to forgo the change.
The Hicks compensation test is from the losers' point of view, while the Kaldor compensation test is from the gainers' point of view. If both conditions are satisfied, both gainers and losers will agree that the proposed activity will move the economy toward Pareto optimality. This is referred to as Kaldor—Hicks efficiency or the Scitovsky criterion.
Equity[ edit ] There are many combinations of consumer utility, production mixes, and factor input combinations consistent with efficiency.
In fact, there are an infinity of consumption and production equilibria that yield Pareto optimal results. There are as many optima as there are points on the aggregate production—possibility frontier. Hence, Pareto efficiency is a necessary, but not a sufficient condition for social welfare. Each Pareto optimum corresponds to a different income distribution in the economy.
Some may involve great inequalities of income.
So how do we decide which Pareto optimum is most desirable? This decision is made, either tacitly or overtly, when we specify the social welfare function. This function embodies value judgements about interpersonal utility. The social welfare function shows the relative importance of the individuals that comprise society.
A utilitarian welfare function also called a Benthamite welfare function sums the utility of each individual in order to obtain society's overall welfare.
All people are treated the same, regardless of their initial level of utility. One extra unit of utility for a starving person is not seen to be of any greater value than an extra unit of utility for a millionaire.
At the other extreme is the Max-Min, or Rawlsian utility function Stiglitz,p [incomplete reference]. According to the Max-Min criterion, welfare is maximized when the utility of those society members that have the least is the greatest.
No economic activity will increase social welfare unless it improves the position of the society member that is the worst off.
Most economists specify social welfare functions that are intermediate between these two extremes. The social welfare function is typically translated into social indifference curves so that they can be used in the same graphic space as the other functions that they interact with.
A utilitarian social indifference curve is linear and downward sloping to the right. The Max-Min social indifference curve takes the shape of two straight lines joined so as they form a degree angle.
A social indifference curve drawn from an intermediate social welfare function is a curve that slopes downward to the right. The intermediate form of social indifference curve can be interpreted as showing that as inequality increases, a larger improvement in the utility of relatively rich individuals is needed to compensate for the loss in utility of relatively poor individuals.Five Ways To Shape Ethical Decisions: Utilitarian Approach May 4, May 4, by capsim Last time, we talked about the significance of shaping an .
A utilitarian would argue that you should pull the lever, since utilitarians believe that the greatest amount of happiness for the greatest amount of people must be sought.
Saving five people instead of one would achieve the greatest amount of happiness for the greatest amount of people in this situation. The approach of phrasing a distributive formulation with respect to the utilitarian theory leading to improved decision making and thus to a good economy is based on Bentham’s understanding of utilitarianism claiming that “the interest of the community is the sum of the interests of the several members who compose it”.
The approach of phrasing a distributive formulation with respect to the utilitarian theory leading to improved decision making and thus to a good economy is based on Bentham’s understanding of utilitarianism claiming that “the interest of the community is the sum of the interests of the several members who compose it”.
The following is an excerpt from article DE from the Christian Research Institute. The full pdf can be viewed by clicking here. Ethics Theories- Utilitarianism Vs. Deontological Ethics There are two major ethics theories that attempt to specify and justify moral rules and principles: utilitarianism and deontological ethics.
Utilitarianism (also . This paper takes a utilitarian approach since we are living in peripheral capitalist economy where managers are quite self-centred in their approach to their profession.
In fact the second edition of Theory and Practice of Managerial Ethics that is due for publication later this year categorically states that Indian managers are very.