Chapter 12

Appreciating the Fundamental Theorems of Welfare Economics

In This Chapter

arrow Checking out how to think about social welfare

arrow Creating a framework for a general equilibrium model of the economy

arrow Moving towards efficiency

Some things just seem wrong, don’t they? Hooters serving champagne, Adam Sandler starring in a serious film, Vladimir Putin singing “Blueberry Hill” … . Well, microeconomics has its own “just doesn’t feel right” moment, too.

When studying any particular market, you want to identify where supply and demand are equal for that particular good. This is called a partial equilibrium. But what happens when you ask the question about all markets rather than just one? Can economists find a general result that holds so that all markets are in equilibrium together? Although it seems to jar with everyday experience and often just doesn’t seem right, surprisingly such a result does exist — given special circumstances. Economists call it a general equilibrium and it’s one of the most startling and least understood parts of microeconomics.

remember A general equilibrium is needed ...

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