AbstractDoes the Pareto criterion discriminate among policy choices when the policymaker does not know the correct model of the economy? If the policymaker can specify ex ante preferences for each agent, there will typically be some policy change that improves the welfare of each agent relative to a status quo that suffers from a preexisting distortion. If in addition there are at least as many commodities as states, the second welfare theorem will typically apply: for almost every Pareto optimum, there is a policy that attains this allocation. Moreover, agents must trade under these policies; optimal allocations cannot be instituted by government fiat as they can be in the standard formulation of the second welfare theorem. The downside is that ex ante preferences impose interpersonal welfare comparisons. If we instead require that policy changes increase all possible social welfare functions, and we are allowed to perturb a base model with additional states, then all policies including the distorted status quo are optimal. The methodology of perturbations is problematic, however, and robust cases exist where at least some policies are suboptimal. Finally, the set of policies that maximize some welfare function is open; consequently, small changes in the environment usually do not call for any policy response
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 480.
Date of creation: 11 Aug 2004
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
welfare theorems; Pareto optimality; taxes; policy paralysis;
Find related papers by JEL classification:
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D60 - Microeconomics - - Welfare Economics - - - General
- D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-16 (All new papers)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Sergio Turner, 2004.
"Pareto Improving Taxation in Incomplete Markets,"
Econometric Society 2004 Latin American Meetings
310, Econometric Society.
- Sergio Turner, 2006. "Pareto Improving Taxation in Incomplete Markets," Working Papers 2006-03, Brown University, Department of Economics.
- Sergio Turner, 2004. "Pareto Improving Taxation in Incomplete Markets," Econometric Society 2004 North American Summer Meetings 614, Econometric Society.
- Sergio Turner & Norovsambuu Tumennasan, 2006. "Pareto Improving Monetary Policy in Incomplete Markets," Working Papers 2006-04, Brown University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.