Normative Economics

1. An allocation of given quantities of goods and services is defined as efficient in consumption if it is not possible to reallocate the resources in such a way as to increase the production of one good without reducing the production of another good. 2. An allocation of given quantities of resources is defined as efficient in production if it is not possible to increase the well-being of at least one individual without reducing the well-being of another individual. 3. An allocation is called efficient in production if it is possible to increase the production of at least one good without reducing the production of some other good by reallocating the given quantities of resources. 4. If it is impossible, by reallocating the given quantities of resources, to improve an individual’s well-being without reducing another individual’s well-being, the allocation is efficient in consumption. 1. The First Theorem of Welfare Economics states that every equilibrium in a polypoly maximizes consumer surplus. 2. An equilibrium in a perfectly competitive market is Pareto efficient because it maximizes the sum of consumer and producer surplus. 3. The Second Theorem of Welfare Economics states that, under specific conditions, every Pareto-efficient allocation can be achieved trough the market mechanisms. 4. From the First Theorem of Welfare Economics one can deduce that only the equilibirum in a polypoly maximizes the sum of consumer and producer surplus.