Overall Balance

And economy of

14 the
Welfare

Chapter
Overall Balance
Partial equilibrium analysis 14.1 AND GENERAL
In section 1.6 are dedecisorias and the operations of the individual markets, considered in isolation. In
Chapters 2 to 13 addressed the partial equilibrium analysis. For its part, the general equilibrium analysis
examines the behavior-
To all the individual units of decision making and all the individual markets in Simultaneously (see the
Problems of 14.1 to 14.4).
This chapter considers a simple economy of perfect competition consisting of two persons ( A and
B),
Two satisfactions (X and Y) and two factors ( L and K), and is first presented a treatment grá
Only in the exchange, after only the production and then the production and exchange simultaneously. In
the second part of this chapter considers the implications of this simple model of the overall balance for the
well-being.

14.2 GENERAL BALANCE OF EXCHANGE

The overall balance of exchange In a simple economy of two people, two goods and No Production
Already presented in section 4.8. Hence it was concluded that the two persons reached the balance in the
exchange of the two satisfactions when the marginal rate of substitution (TMS) in the consumption of both
was the same for the two persons. Therefore, the following example is a review of section 4.8 and the
problems of 4.24 to 4.27.

Example 1 The A and B), two satisfactions (X and Y) and no

production-
Tion. Every point in the table represents a particular distribution among people A AND B OF THE QUANTITIES 12X and
12and available-
Available in the economy. Three of the curves of indifference of A (with origin in Or
A. Are 1,2 and 3; the curves of indifference of B
(with origin in Or
B. Are B 1, B2 and B 3. If the initial distribution of 12X and 12AND BETWEEN PERSONS A and B the determines the H point
Of the 1 and B1 in the H point di Xy FOR A is not equal to the TMSxy for B) and there is a
Basis for the exchange. The exchange mutually advantageous ends at a point like D (to over2 and B2) in the
One of the curves of indifference of To Is tangent to a curve of indifference
of B. At that point, the TMS
The B. By joining these points of tangency, Recruitment curve of consumption or Xy is equal to
ACDEOB in the
More detailed, see the problems of 4.24 to 4.27). Therefore, this simple exchange economy will be in balance when

312
14.3 E GENERAL EQUILIBRIUM OF THE PRODUCTION 313
Find on its curve of recruitment (i.e., provided that the TMS Xy FOR A is equal to the TMSxy for B). The

Is often known as Edgeworth box diagram.

X
Or To 24 6 8 10 12
X
Figure 14-1
14.3 GENERAL BALANCE OF PRODUCTION
The producer of two satisfactions ( X and Y) that uses two factors ( L and K)
reaches the Overall balance of the production-
Tion Provided that the marginal rate of technical substitution between LK) in the production of X is equal to the
L and K (TMST
TMST
LK in the production of Y. The overall balance of the production of this economy can be displayed if used
A diagram of Edgeworth box.

Example 2 In the L and the

12 units of K available in this economy. For example, the point R said that to produce
X1 of satisfactor X are used 3L
10K and that to produce And1 Of
satisfactor and used the remaining 11L and 2K. Three of the isocuantas X (with origin in OR X) are
X 1. X2 and X 3; the isocuantas AND (with origin in ORAnd) are and1, Y2 and
Y 3.
L

Figure 14-2
 314 C

If the economy was originally in the POINT R, would not be maximizing their production of X and Y, because the
slope of
X1 At that point exceeds the slope of Y1 (i.e., the TMST LK in the production of X exceeds the TMSTLK IN THE PRODUCTION OF AND).
With only transfer 8K of the production of X to the production of and, and 1L of the production of and the production of X, this
economy
You can move the point R (On X1 and Y1) to the J-point (on X 1 and 3) and to increase their production and without reducing the X. On the other hand
Part, this economy can move the point R To Point N (and increase their production of X without reducing the and)
beyond 2K
The production of X to the production of And, and 8 L And to X. Or,
transferring 5 K of the production of X to the production of And and 5 L
And to X, this economy can move from point R (on X 1 And Y1) to point M (on X 2 and 2) and increase the production of both X

As of and. In the points J, M and N a isocuanta X is tangent to a isocuanta andtherefore (TMST

LK)x
If you join these points of tangency gets the Curve of recruitment of the The xJMNOy

production or
With only transfer some known quantities and L and K available between the
production of X and And, this economy can
move from a point that is not on the curve of production contract to a point on it and thus increase their
production. Once it is on its curve of recruitment of production cannot be obtained additional net profits in the
production and the economy is in the overall balance of the production.

14.4 The transformation curve

If you mapped the curve of recruitment of the production of the
Duction, gets the Transformation curve of the product Accordingly. The transformation curve shows
the
Various combinations of X and Y that can produce this economy to make full use of all its L and K
The best available technology.
Example 3 If the 1 Of the

isocuanta X
It can be passed from the J point on the curve
of recruitment of the production (and the space
of inputs) 3. ) J In
The area of production of the X2
14-2 to point M In the
X3
The J, M and N are
gets the transformation curve for X and Y (see

Figure 14-3
The transformation curve shows the various combinations of X and Y that can produce this economy when it is in the
Overall balance of the production. The point R within the transformation
curve corresponds to point R of the
Indicates that the economy is not in the overall balance of the production. If you are reassigned some of the factors L and K
Production of X and Y, this economy can increase its production of And ( J point), its production of
X (Point N), or their production
Both of X as of And (point M). With the factors L and K
This economy cannot reach points above its curve of transformation.
 315

14.5 The SLOPE OF THE CURVE OF TRANSFORMATION

The slope of the curve of transformation In a particular point provides the marginal rate of transformation of
X by And (TMTxy) at that point. Measures the amount that this economy has to reduce its production of and to
Release your L and K to produce exactly one more unit of X.

Example 4 In point M Of the Xy, is 1, that significant

Reduce the amount of And produced in a unit in the POINT M, releasing the
his L and K of the production of And to allow
Produce exactly an additional unit of X. Note that as there is a scrolling down by the curve of
Processing, for example from the point M Until the Point N , its slope, or TMTxy, increases. This significant
Renounce every time more than And for each additional unit of X; that is to say, this
economy incurs costs growing (for the
Quantities of And it has to resign) to produce each additional unit of X. This is a case of imperfect substitutability
Of factors. As a result , the curve of transformation in the

14.6 GENERAL BALANCE OF PRODUCTION AND EXCHANGE

It is now possible to combine the results of sections 14.2 and 14.5 and to analyze how our economy sen-
cilla can achieve the simultaneous general equilibrium of production and exchange.
If you take a particular point on the curve of productive transformation of the economy, is further
Particular combination of X and And produced. With this particular
combination of X and Y is possible to develop a diagram
Edgeworth box and obtain the curve of recruitment of consumption. Thus, this economy will be
simultaneously
In general equilibrium of the production and exchange Xy

When TMT
Example 5 The curve of transformation in the
Training corresponds to a point of general equilibrium production. Suppose that the production of X and And obtained
by this
Economy is given by the point M (i.e., 12 X and 12 And) on the curve of transformation. To draw perpendicular
from the point
M until both axles, you can make the box plot of Edgeworth (see A AND B.
Each point on the curve of ACDEOB is a general equilibrium point of exchange. However,

recruitment of consumption

Or
This simple economy will be simultaneously in overall balance of production and exchange in the POINT D, Xy)A

where (TMS
(TMS
Xy)B
Exchange. For example, if the Xy)A
(TMS
Would be indifferent) to renounce two units of e And consumption by an additional unit of X, wh
It is necessary to renounce a unit of And to
x X. It is therefore could p
And until (TMSXY)A c
When this economy is in general equilibrium of production and h
exchange is concluded the following: a
1. Produces 12X and 12and (point M in the n
Level of production; 2) the person To receives 7 g
e
X and 5AND, WHILE THE PERSON
B receives the remaining 5
a
X and 7 And (point D of the n
14-4ucir 12X 8 usedL and 5 K, while that to produce the d
12 And to use the 6 L and 7K remaining (see point
M in the . (For a study of the PL, PK, Px and Py of balance, see the problems t
1413 and 1414; in the problem 1415 is h
Analyze the conditions for the overall balance of the production, e
316 C

The welfare economy

14.7 definition of welfare economics

The The welfare economy Looks at the conditions in which it can to
Overall balance is optimal. This requires an optimal allocation of the factors between the satisfactions and
optimum allocation of the satisfactions (i.e., the distribution of income) between consumers, among other
things.
It is said that an assignment of factors of production is the Pareto optimal if production cannot be re-
Organize to increase the production of one or more satisfactions without decreasing the production of
some other. Therefore, in an economy of two satisfactions, the curve of recruitment of production is the
locus of the Pareto optimal allocation of the factors in the production of those satisfactions. In a similar
way, it can be said that an allocation of satisfactions is the optimal allocation of Pareto if the distribution is
not can reorganize to increase the usefulness of one or more persons, without diminishing the utility of
another person. Therefore, in an economy of two people, the curve of recruitment of consumption is the
locus of the Pareto optimal distribution of the satisfactions between two people.

14.8 THE CURVE OF THE POSSIBILITIES OF THE UTILITY

If you mapped the curve for the recruitment of the consumption of the
Dad gets the Curve of the possibilities of the utility Corresponding, which shows the different combinations
Of utility that receive the people A and B (i.e., OrA and uB) when the simple economy of the section 14.1 is in
Overall balance of trade. The point on the curve of recruitment of consumption in which the Xy for to and
TMS
B equal to the TMT
Xy is the point of the Pareto optimal allocation in the production and consumption on the curve of
The possibilities of the utility.
Example 6 If the indifference curve 1 Of the

To
U
To 3 is re B
Of production) in the C in the space of the utility 2 Re To

To
300 useful and B
Re 1 are re B 2 Re B 3

U
C, D and M

And you get the curve of the possibilities of the utility F

D OF THIS D in the
Simultaneously , in both the production and consumption.

UB

500
C(A 1.
B
3
)
400 D(A 2, B2)

300

E(To
Figure 14-5
 14.10 L The social welfare function 317

14.9 curve of possibilities of great utility

To take another point on the curve of transformation, you can develop a box plot of Edgeworth curve and a
recruitment of different consumption. Based on the foregoing it is possible to obtain a new curve of the
potential of utility, and another point of the optimal allocation of Pareto in production and
consumption. This process can be repeated any number of times.
Production and exchange, you can obtain the curve of possibilities of great utility .
Example 7 The curve of the possibilities of the M

utility F
Consumption of the point or line
To the point M
Transformation of the N, it is possible to develop another diagram of Edgeworth box and
get
Another recruitment curve of consumption, drawn from the Up to the point N
point

Or
Recruitment of different consumption (which is not shown in the
Ity (F N
(point T In the D, T And others obtained in a similar way, it is possible to obtain the
curve
Of possibilities of great utility G of the
The points of the Pareto optimal allocation of production and exchange. That is to say, any reorganization of
the process of production-distribution can do to improve the situation of a person without at the same time worsening
of another person.

Figure 14-6
14.10 THE ROLE OF SOCIAL WELFARE
The only way to determine which of the points of the optimal allocation of Pareto on the curve of
possibilities of great utility represents the maximum social welfare is to accept the concept of the
comparison of the interpersonal use
Dad. It will be possible to formulate social welfare functions. a social welfare function displays the various
Combinations of uA and UB that give the company the same level of satisfaction or welfare.
Example 8 In the 1. W2 And W 3 are three functions of social welfare or social indifference curves of the map

W
Dense social welfare of this society. All the points on a certain curve give to society the same level of satisfaction or
welfare. The lowest preotra society. However, note that a movement along a curve of social welfare makes a person
improve while another worsens. Accordingly, with the ethical or value (i.e., a interpersonal comparison of the utility).
U 0 UT
T o
o

Figure 14-8

318 C APÍTULO 14 E GENERAL EQUILIBRIUM AND

WELFARE Economics

Figure 14-7

14.11 THE POINT OF SOCIAL WELFARE MAXIMUM

The Social welfare maximum It gets to a point where the curve of possibilities of great
utility is tangent to the
Curve of social welfare.

Example 9 To superimpose the map of social welfare or indifference of the

Great utility of the D
In the on the curve of possibilities of great utility, has chosen that represents the maximum social welfare. Note that there is now
It has eliminated all the indetermination (how much produce X and Y) to be studied to
To that society maximize your wellbeing: 1) Umust be equal to 300 useful, while uB must be equal to 400 useful (point D
The X and 12 And (point M of the A must
receive 7 X and 5 And
While the person B receives the 5X and 7and remaining (Point D of the X is necessary to
use 8L and
5 K, and 6 L and 7K remaining should be used to produce the 12 And (see
point M of the
The general solution for balance that maximizes the social welfare.

14.12 perfect competition and economic efficiency

It has been observed that with the
Tisfacerse simultaneously the following three groups of conditions: 1)LK)x
(TMST (TMS
Xy)B, and 3) (TMSxy)A Xy. These three conditions will be fulfilled when all markets of the
Economy are perfectly competitive (see the problem 14.20 for a demonstration). This is the argument
Basic to favor of the perfect competition .

14.13 externalities AND MARKET FAILURES

An externality is a divergence between private and social costs, or between the private profits and
The social gains. In cases of " Market failures", the pursuit of private profit does not lead to the welfare
Maximum social, even if in all markets there is perfect competition.

Example 10 In chapter 8 it was studied that the optimal level of production of a company perfectly competitive is
Given by the point where P CM AND CM
is on the rise. However, if the company pollutes the air, its marginal cost Private
Is less than the marginal cost Social and therefore, there is too much of this satisfactor for the social welfare maximum.
By
Another part to form more responsible citizens, the bene private marginal (for example, the beneeducación from the point of view of
society.
 GLOSARIO 319

1414 Public Goods

Market failures are also produced by the existence of public goods. The Public goods Are those
That are not rivals in the consumption ; that is, the use that someone will give the good or service does not
reduce its availability
For others. For example, that a person can see normal TV not interen others. Some public goods (such
as cable TV) are mutually exclusive (i.e., the service can be limited to whom-
Nes pay for him), while others, such as the national defense, are Not mutually exclusive (i.e. it is impossible to
restrict the
Bene
The public goods that are not mutually exclusive lead to the problem of the stowaway; that is, the reluctance of
people to
Pay for public goods to believe that all forms will be provided; what causes that they are to be supplied in a
quantity or quality less than optimal if the government has no money to pay for them by the imposition with
accuracy its preference for the public good, or sue. Since more than one person can consume a certain
amount of a public good at the same time, the aggregate demand or total of the well is obtained by the
vertical sum of the demand curves for all those who consume it.
Example 11 In the A and dB are, respectively, the demand curves of the public good people X A and B.

D
If these are the only two people in the market, the curve of the aggregate demand of the public T. Is obtained by the
sum
good
X,
D
Portrait of d
A and dB. The reason is that both people can eat at the same time each unit of good. Given the curve of the
Offer of the market s
And S X THE PUBLIC GOOD X, the optimal quantity of X is 4 units per period (indicated by the intersection of DT
X in point E). In point E, the sum of the bene
Units of the public good (i.e. AB BC AE).
P X ($)

6
Sx

3 E
DT
C DB
B DT
o
0 24 QX
Figure 14-9 record

Glossary
General equilibrium analysis Studying the behavior of all units of individual decision-making and
All the individual markets, simultaneously.
Optimal allocation of Pareto (u Pareto optimal) Condition in which the production and distribution cannot reorga-
Nizarse to increase the production of a satisfactor or usefulness of a person without reducing the production of the
other satisfactor or utility of the other person.
Public Good Goods and services whose consumption by some people does not reduce the amount available for others.
Social welfare maximum Is obtained at the point where the curve of possibilities of great utility is tangent to a curve of
Social welfare.
 320 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

Consumption not rival A distinctive feature of a public good, according to which the consumption by some people does
not reduce the
Quantity available to others.
Curve of recruitment of the production Locus of points where the isocuanta of a producer is tangent
The isocuanta of another producer.
Recruitment of the consumption curve The locus of points where the indifference curve of a person is
Tangent to the indifference curve of another person.
Curve of the possibilities of the utility Shows the various combinations of utilities that receive two people in
Overall balance of trade.
Curve of possibilities of great utility Locus of the optimal allocation of Pareto in production and the inter-
Change.
Transformation curve of the product Shows the various combinations of two satisfactions that can produce a
Economy to make full use of all its resources with the best available technology.
The welfare economy Looks at the conditions in which it is possible to
Overall balance.
Overall balance of exchange The condition in which the marginal rate of substitution (TMS) in the consumption of two
satis-
Factors is the same for both people.
Overall balance of the production The condition in which the marginal rate of substitution technique (TMST) of a factor
by
Another is the same in the production of both satisfactions.
Overall balance of the production and exchange The condition in which the marginal rate of transformation between
two
Satisfactions is equal to the marginal rate of substitution in consumption between the two satisfactions for each person.
Externality and market failures Re
Private profit and social profit.
Social welfare function Shows the various combinations of the utilities of two people who provide the
Society the same level of satisfaction or welfare.
Non-exclusion situation in that it is impossible or prohibitively expensive to limit the bene
To those who pay for it.
Slope of the curve of transformation The marginal rate of transformation of a satisfactor by another in the
production.
Problem of stowaway Reluctance of people to pay for an optimal amount of a public good to believe that all
Forms will be provided.

Review questions
1. In an economy of two people (A AND B) and two satisfactions ( X and Y), the overall balance of the exchange is
reached when
A) TMT Xy

Resp. C) See section 14.2.

2. The locus of points of general balance of exchange in an economy of two people and two satisfactions
Is known as a) the curve of recruitment of consumption, B) the curve of recruitment of the production, C) the role of
well-
Be social or d) The curve of transformation.
Resp. To) See the example 1 and the

3. In an economy of two satisfactions (X and Y) and two factors (L and K), it reaches the general balance of
production when
A) TMST LK
Resp. D) See section 14.3.
 PQUERIES THAT YOU MAY HAVE TO REVIEW 321

4. The transformation curve is obtained from a) the consumption curve, B) the curve of
the possibilities of the utility, C) function
Social welfare or d) The curve of recruitment of production.
Resp. D) See section 14.4.
5. The slope of the curve of transformation is determined by a) TMT Xy, b), c) TMSTLK TMSxy or d) all of the above.

Resp. To) See section 14.5.

6. In an economy of two people (A And B) and two satisfactions ( X and And), the
overall balance of production and exchange-
Bio occurs when A) Xy

TMT (TMS
Xy)B.
Resp. D) See section 14.6.

7. It is said that a distribution of two satisfactions between two people is the optimal allocation of Pareto if
A) cannot be improved to a person without harming the other,
B) The people are on its curve of recruitment of consumption,
C) the people are on its curve of the possibilities of the utility or
D) all of the above.

Resp. D) The Option A) is the

The curve of recruitment of consumption is the locus of the Pareto optimal points on consumption, whereas the curve
of possibilities of the utility is obtained from the curve of recruitment of consumption and, therefore, also is the locus of
the Pareto optimal points in consumption.

8. To get the curve of possibilities of the utility is made interpersonal comparisons of utility. . . A) always,
B) Never, c) sometimes or d) often.
Resp. B) to plot a curve of possibilities of the utility, the scale A is totally independent of the scale uB. In the form
U
More specifically U
To

9. The Locus The optimal allocation of Pareto in the production and consumption is determined A) the
welfare function
Social, b) the curve of possibilities of the utility, c) the curve of transformation or d) The curve of possibilities of great utili-
Dad.
Resp. D) See section 14.9.

10. It is necessary to develop an ethical judgment or value with a) the curve of transformation, b) the curve
of con-
Of consumption, c) the curve of possibilities of great utility or d) The social welfare function.
Resp. D) See Section 14.10.

11. In an economy of two satisfactions (X and And) and two

persons (A AND B), the social welfare maximum is reached in A) Any
Point on the curve of possibilities of great utility, B) any point on the social welfare function, C) the point
Where TMT Xy
Social welfare.
Resp. D) See the point D of the

12. The perfect competition leads to a point on the curve of possibilities of great utility. A) always, b)
Never, c) some-
Nas times Or d) cannot be determined.
Resp. ( c ) The perfect competition leads to a point on the curve of possibilities of great utility, except when
Presented externalities.
322 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

Resolved Issues
Overall Balance
14.1 A) What is the partial equilibrium analysis? Why is used? B) What is the relationship between the
analysis of the
Partial balance and the analysis of the overall balance? What achieves the general equilibrium analysis?
C) When Do
It is possible to
A) in the partial equilibrium analysis is studying units of decision-making and specific markets
Traction of the interconnections between them and the rest of the economy. Therefore, examines in detail the
behavior of individuals who act as consumers, managers and owners of factors of production; also studied the operations of
individual markets, due to the partial equilibrium analysis reduces the problem in Is- tudio to manageable proportions, while at the
same time it provides, in most of the cases, a close approximation to the results that are searched.
B) The actions of each decision making unit and the operation of each market affect, to a greater or lesser
Measure to all other decision-making units and to all the other markets in the economy. These interrelationships are
The subject of study of the analysis of the overall balance; in other words, the general equilibrium analysis examines
the interrelationships of various units of decision making and the various markets of the economy in an attempt to provide a
comprehensive response, explicit and simultaneously to the basic economic questions of what, how and to whom to produce.
C) the whole economy is in general equilibrium when each unit of decision and market are individually and simultaneously-
Te in balance.

14.2 From a position of overall balance in the whole economy, if for some reason the market supply of
Satisfactor X (S x. Increases, examine what happens to) in the market of satisfactor X, and their substitutes and

Add-ins, b) in factor markets and c) in the distribution of income.

A) If increases Sx, Px decreases and QSx Increases. With the partial equilibrium analysis, one stops at this point. Without em-

Bargo, the greater the effect of the changes in the market of satisfactor X on the rest of the economy, is
Less satisfactory the partial analysis. The decrease of PX increases the demand for satisfactions complementary and
Reduces the demand of satisfactions substitutes. Therefore, the price and quantity of the satisfactions
complementary increases, and the price and quantity of the satisfactions substitutes decreases (if the curves of the offer have
positive slope).
B) The previous changes to the market of the satisfactions that affect the markets of the factors. The derived demand and,
Thus the price, the amount and the income of the factors that are used in the production of the satisfactor X and their
satisfac-
Tors complementary, increase; the derived demand and therefore the price, the amount and the income of the factors
that are used in the production of the satisfactions substitutes, lowered. These changes in factor markets are love- tiguados by
substitution of factors in the production induced by relative changes in factor prices.
C) due to the changes detailed in paragraph B), the entry of a number of factors of production and the distribution of
Income change. In turn, these changes affect, to a greater or lesser extent, the demand of all the satisfactions
X. It is thus affected the derived demand of all the factors of production and
The process continues until all the markets of the satisfactions and factors are again in balance simultaneously and
also the economy is in general equilibrium.

14.3 Suppose: 1) a simple economy that is in general equilibrium perfectly competitive in the long term in
Its start, 2) L and K are the only two factors of production and will have a quantity
There are two satisfactions, X and Y, and x is the one that uses greater amount of L (i.e., occurs with a reason L/K
Higher ) than AND, 4) the satisfactions X and Y are substitutes and 5) industries of X and Y are of rising
costs.
A) to analyze, from the point of view of the partial balance, what happens if DX increases. b) What happens in the
Satisfactor market and? C) what happens in the markets of both labor and capital? D) How affect their
Time changes in labor and capital markets to the economy as a whole?
A) When DX increases, so does Px. The companies now produce the satisfactor X gain and, by
Both, can increase the production of such satisfactor in existing plants. In the long term, built plants more
Large and enter the industry most companies until that all profits disappear. Since the industry X is
Rising costs, the price and the amount of new long-term balance are higher than at the point of balance
Original. With the partial equilibrium analysis is used the course Ceteris paribus (i.e., that everything else perma-
Need constant) and the process ends at this point.
 PROBLEMAS RESOLVED 323

B) but it is clear that "other aspects" do not remain constant. Due to that X and Y are substitutes, the increase of
D X and Px decreases Dy and therefore Py low. Now, companies that produce and suffer losses in the short term,

That forces them to reduce their production. In the long term, some leave the industry until the remaining enterprises
Arrive just to the point of balance. Since the industry of And it is also of increasing costs, its price and
production
New balance in the long term are lower than in the original point of equilibrium.
C) to produce more X and less And, something of L and K must
move from the production of And to the production of X. Without
However, as the reason L/K is highest in the production of X that in the production of And, PL HAS TO
INCREASE
In relation to PK to
P
L with respect to PK is moderated by the replacement of K by L induced by the price in the production of both X as
Of AND.
D) income from work of the people increases in relation to the income of their own capital. By with-
Next, the incomes of the people and its distribution change, which results in the displacement induced by the
Income in DX and Dy and resulting changes in Px and Py. The change in Px causes an additional offset
Of Dand the change in Px produces an additional offset of Dx. These displacements in Dx and Dy Cause
Changes in DL, DK, PL AND PK, and the process continues until the economy returns again to the overall balance.

14.4 Can an economy achieve the overall balance in the real world?
Since in the real world tastes, the technology and the supply of labor and capital are continually changing, the economy
always gravitates around a point of general equilibrium, although it never reached. That is to say, before the economy to adjust
completely to a change especícambiar, which will keep the economy in a continuous process of adjustment.
If, therefore, the reader considers that the analysis of the overall balance is too complicated, has reason: imagine the
degree of complexity of a general equilibrium model true - although impossible- (where everything affects everything else) in an
economy such as ours, composed of hundreds of factors, thousands of satisfactions, millions of businesses and tens of millions of
families or consuming units. However, the simple model of balance- general of the following problems shows the interrelationships of
the various sectors of the system and provides at least an idea of the analysis of the balance (truly) general.

14.5 Suppose that the isocuantas the satisfactions X and And are of X1, X2, X 3 and 1 and 2, and
3, respectivamen-
Te. Also assume that for the production of X and Y are only account with 18L and 12K. A)
Draw a diagram of
Edgeworth box for X and And. B) from the point where X1 intersects and1, shows
that the production of X,
Of And or both, may be increased by the amounts given of 18 L and 12 K. C) How do you get
the curve of
Recruitment? What does this?

Table 14.1

X Isocuantas Isocuantas of and

X X X A An A
1 2 3
nd d n
1 2
d
3
LKLKLKLKLKLK
3 10 7 9 9 10 3 6 9 9 13 10
4 5 8 7 12 8 6 4 10 5 14 7
6 2 11 4 15 7 15 2 13 3 16 5

A) The Edgeworth box diagram for X and Y are displayed in the

B) IN THE POINT R (where X1 intersects Y1) are used 3L and 10K TO PRODUCE X 1 X and to produce and 1 of, and are used
The remaining 15L and 2k. In the R point the TMST (LK)x > (TMSTLK)and. A downward movement of the isocuanta X1,
Point R The point 1), but much more of and (Y3). By

J gives as a result there is the same amount of X (X

Another part, the movement of the point R To Point N along the isocuanta And
1 Allows you to produce the same amount of and
 324 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

L
12 16 14 12 10 8 6 4 2 Orand
10 2 K
R
8 N 4

M6 X3 6
J And1
4 X2 8

2 A 10
n
d
2
K X1
And
3
Or X 24 6 8 10 12 14 16 18
L

Figure 14-10

And1), but much more than X (X3). Or could be a movement from the R point (on the isocuanta X 1 and 1) until the
Point M (on the isocuanta X 2 And Y2), and thus increase the production of both X and Y. Note that once a

Isocuanta X is tangent to a isocuanta And (and then the LK for X and Y is the same), it is not possible to increase the
TMST
Production of one of the satisfactions without reducing the production of the other. These points of contact are
insured by the convexity and because the fields of the isocuantas are dense.
( c ) The line joining the point J with points M and N provides a part of the curve of recruitment of the production.
The
Draw many more isocuantas for X and And and join all the points of tangency, would be the entire curve of
Recruitment
The production, that is to run Orx to Oy (see
The curve of recruitment of the production to a point on it gives as a result the increase in the production of
X, And, or both, Without using more L or K . Therefore, the curve of recruitment of
production is the locus
The overall balance and the Pareto optimal points in the production.

14.6 A) determine the condition of balance that is maintained along the curve of recruitment of the production,
And B) expressed in terms of the marginal productivity the condition of balance is maintained throughout
The curve of recruitment of the production. C) What is the value of theLK IN THE POINT M of the
TMST 14-10?

A) TMST LK)x
B) Since TMST LK
For the recruitment of the production can be restated in terms of productivity as
PM PM A
L L n
d
PM
K
PM
K
X
C) The value of the TMST LK IN THE POINT M what determines the slope of the isocuantas common absolute X 2 and Y2 In Point

M; this value is 3/2 (see

14.7 If, in the X1

Get the transformation curve corresponding to the curve of recruitment of the production of the problem
14.5To). B) What represents a point inside the curve of transformation? What one out of it?
PROBLEMAS RESOLVED 325

And
P
80 J (X1, Y3)
70 60 M(X 2.
Y
2
50 R )
40 N(X 3, Y1)

30
20
10
020 30 40 50 60 70 80 90 100110120 X
Figure 14-11

A) THE POINT J Of the J (On X1 and Y3) of the

Point M (on X2 and Y2) and the point N
Ma similar. By joining these points is obtained the curve of transformation that is shown here. Therefore, the curve
of transformation is obtained by mapping the curve of recruitment of the production from the space of inputs into the production space. The curve of
transformation is the locus of points of the maximum production of a satisfactor for a given output of another. It is the geometric point of overall balance
and the allocation
Pareto optimal in the production. The transformation curve is also called Curve or border of possibilities
Of production.
B) a point inside the curve transformation, for example the point R (which corresponds to point R in the
Represents an assignment not optimal of resources. A point as P in the
Technology and the L and K available. Can only be achieved if there is an increase in the quantities of the L OR
K available
In this economy, if there is an improvement in technology, or both.

14.8 A) interpret the slope of the curve of transformation. Evaluate the slope of the curve of transformation
of
The M. B) Why the transformation curve is concave with respect to the source?
C)
What would indicate a rectilinear transformation curve?
A) The slope of the curve of transformation provides the TMT Xy, or the amount that is necessary to reduce the pro-

Production and effect of releasing the amount your L and K in order to increase the production of X in a unit.
Note that it also TMTxy
It is possible to produce 2 additional units of X. Therefore, X
CM
Among the points J And M The xy average is equal to the absolute slope of the rope J
? And/∆X 10/30, or 1/3. Also, between points M And N , The TMT Xy average is equal to the slope of
the Rope
MN, which is 2/3. As the distance between two points on the curve of transformation decreases and tends to
Zero in the limit, the TMTxy tends to the slope of the curve of transformation into a point; therefore, in the POINT M
TMTxy
B) the curve of transformation of the
TMT Xy, increases as there is a scrolling down along her) due to the substitutability imper-

Fecta of the factors. That is, as this economy reduces its production of And, frees L and K in combinations
That is becoming less suitable for the production of more X. Therefore, the economy incurs a CMX
Growing in terms of and.
C) a rectilinear transformation curve has a constant slope of TMT Xy and re

Representatives, rather than increasing.

14.9 Suppose that in the economy of the problems 14.5 and 14.7 there are only two people ( A AND B),
which selected
The combination of X and And indicated by the dot M (60 X, 70 And) on the
curve of transformation of the
14-11. Also assume that the curves of indifference of the people A and
B The determine
326 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

1 Intersects the indifference curve B1, to show that it is possible a

The point where the indifference curve
T
o
Exchange mutually advantageous. C) How do you get the curve of recruitment of consumption? What does
this curve?

Table 14.2

Curves of indifference to Curves of indifference of B

To T T B B B3
1
o o 1 2

2 3
X AND X AND X AND X AND X AND X AND

5 60 25 45 15 65 5 20 10 50 35 60 15 25 35 35 40 55 20 15 25 35 45 45 30 15 50 30 55 53 55 10 40 33 55 40

A) in the A AND B. Any point in the box

Of Edgeworth (or on her) represents a specific distribution X and 70and produced between
persons to and
B (in the point M on the curve of transformation of the H indicates that a has 5X
And 60 And, while B has the 55 X and 10and remaining. The curves of indifference of (i.e., To1,2 and 3) have their
Origin in OR A. While the curves of indifference of B (i.e., B 1, B2 and B 3) have their origin in or B.

X
50 40 30 20 10 O
r
B
70
60 H 10 A
E To n
50 3
d
20
B1
40 30
D
30 TO2 4
C
0
20 5
B2 0
To1
And 10 60
B
3
Or T 10 20 30 40 50 60
o
X
Figure 14-12
B) IN THE POINT 1 Crosses B1), the slope to 1 (i.e., the TMS Xy for (A) exceeds the slope of B1 (i.e.,

H (WHER
E TO
The TMS
(On Xy for B), so that there is a basis of exchange mutually advantageous. For example, starting from the point H 1 And B1), IF A W

T
o
Both are bene 2 Is tangent to B2; i.e. the (TMS Xy)A is equal to the (TMSxy)B, and then no longer

D, T
O
There is a basis for carrying out an exchange mutually advantageous. The higher the bargaining strength
Of To, the point of balance E (see the A
With the exchange in connection with B. The higher the bargaining strength of B, the point of balance
Exchange will be closer to the point C and the greater the gain of B in the exchange in connection with To.
 PROBLEMAS RESOLVED 327

C) to join the points of contact of the curves of indifference of A and B is obtained the curve of recruitment of
consumption
Or ACDEOB (see

Dense. A movement from a point that is not on the curve of recruitment of consumption until a point os-
Bre she bene To, To B or both. Once they are on the curve of recruitment of consumption, one of
the two
People cannot be improved without the other is compromised. Therefore, the curve of recruitment of consumption is
the locus of points of general balance and the optimal point of consumption of Pareto. The different points on the
Recruitment curve of consumption was reX and Y) between the
People A and B.

14.10 A) determine the condition of balance that is maintained along the curve of recruitment of consumption,
and
B) expressed in terms of the utility that condition. C) What is the value of theXy in the D point and In point
TMS
C of the
To) (TMSXy)A
B) Since TMS Xy

Recruitment of consumption can be restated in terms of usefulness as

UMx UMx
UMand To UMand B

C) The value of the TMS Xy in the point D what determines the slope absolute common of the curves of indifference to 2 and B2 in

That point. Therefore, in the POINT D The slope of to 2 (or the TMSxy of (a) 2 (or the TMSXY B)

1/2 (see C, the TMS

Xy A and B

14.11 Shingle the diagram of the Edgeworth box

14-11 and determine the overall balance and the optimum point of Pareto of production and distribution.
This simple economy will be in overall balance of production and distribution (and in the optimal allocation of Stop-
To) simultaneously on the point D, where (TMSXY)A
Demonstrating that, With production in the POINT M, THE POINTS C and E cannot be points of
general equilibrium
Production and distribution. For example, in the POINT C, (TMSXY)A
This significant A and B would be willing (or would be indifferent) to renounce a unit of consumption
of and
By an additional unit of X, while in the production it is possible to obtain two additional units of X to transcend-
Ciar to a unit of and. If this is the case, such a society would not have chosen the combination of X and Y given by the
point M,
But rather a point below on its curve of transformation (that include more X and less and). In point E,
occurs
Exactly the opposite. Therefore, with the production of X and And given by the point M, THE PEOPLE A and B would
have to in-
Contrarse in point D, so that (TMSXY)A
Simultaneously in overall balance of production and distribution (and in the optimal allocation of Pareto). [in the Problem
14.19A) will be studied exactly why this society elected produce in the point M.]

14.12 If the society of the problems 14.5, 14.7, 14.9 and 14.11 decides to produce in the POINT M on its
curve of
Transformation, determine A) what amount of X and Y produces?, B) How are
distributed these X and Y between the
People A and B?, and c) what amount of L and K is used to produce X and how much to produce and? D)
What pre-
Guntas have remained unanswered in this general equilibrium model?
A) This society produces 60 X and 70 (given by the point M on the curve of transformation in the
B) THE PERSON A receives 35X and 35AND, while the person B receives the 25X and 35and remaining (given by the
point D of the
 328 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

And

90 80
J
50 40 30 20 10 40
70 30 20 M (or B)
H
60 E 10 To
10
33
50 20
B 1
N
40 30
D
30 C To 2 40

20 50
10 To1 B2
B3 2 60

Or X
To
10 20 30 40 50 60 90 12
Figure 14-13

C) This society uses 8 L and 7 K to produce 60 X, while the 10 L and 5

K remaining is used to produce 70 And
(Given by the point M in the
D) has not yet been analyzed the way in which this society decides to produce 60 X and 70 And [this question is answered in
the pro-
14.19b)] problem nor has said anything about the P x. Py, PL AND PK balance (see the two following issues).

14.13 Suppose that the simple economy of the problem 14.11 produces 60 X and 70and when it is in
balance
General production and exchange (and in the optimal allocation of Pareto). A) What is the value X/Py in
of P
Balance? B) What is the value of P
L/PK in balance? (c) What can be said about the Px, Py, PL AND PK
In balance?
A) in the problem 14.11 A) it was noted that with the production of 60 X and 70 And this simple economy is in
equilibrium ge-
Neral of production and exchange (and in the optimal allocation of Pareto) when (TMS Xy)A
Which occurs at the point D of the To2 and B2
Is equal to the slope of the curve of transformation (in the point M); this is equal to 1/2. But in the problem 4.20 is
Noted that consumers select the amount of X and And so that TMS
Therefore, when this simple economy is in general equilibrium, P Xy
X/Py
B) If you are considered to be the markets of the factors, it is noted that the point M on the transformation curve corresponds
The point M on the curve of recruitment of the production. The slope of the isocuantas common 2
A
absolute X n
d
In point M is equal to 2/3 (TMST
Y
2
LK)x
He noted that the producers selected the amount of L and K in such a way that TMSTLK
In balance. It follows that when this simple economy is in general equilibrium, P
(2/3) P L/PK
K. It is therefore possible to determine the reasons for the equilibrium price of the production and of inputs
In this economy.
C) since only has been treated with variables Reais (i.e., non-monetary), it is not possible to determine the value of a
balanced-
Absolute brio unique to P x. Py, PL AND PK. Everything that can be done is to assign an arbitrary price to any satis-

Or factor and then express the price of all other satisfactions and factors in terms of this " Cash"
(see the following problem). For the purpose of x. Py, PL AND PK absolute only would have to be added to our model

obtaining P
A monetary equation, as "equation of exchange" of Fisher, who is studied in a course of macroeconomics ,
 PROBLEMAS RESOLVED 329

And in fact is not necessary in an introduction to the overall balance and to the welfare economics. Here everything that
Is required are the Relative prices or Reasons for prices Of balance of inputs and production, same
What you have.

1414 If it is assumed that Px

Exchange, ) determine And and (b) determine PL if the (PML)x
P
is the (PM
L)and? C) Determine PK. d) If it had established Px
A) Since X

P
B) in perfect competition, each employer that maximizes their profits used each factor until the point where the va-
Lor of their marginal product in each use is equal to the price of the factor. Therefore, PL
$40. On balance, PL
$2.
C) due to L

P
D) If Px
The paragraphs ( a ), B) AND ( C ). Therefore, the spec Px (cash) it is possible to deter-
Nar the corresponding price of another satisfactor and the factors. The Spec Px differently, it will make all
Other prices are proportionally different. Note that you could use one of the prices of the factors as
The cash. In that case, the knowledge we have of the marginal product of balance of the factor in the production
One of the satisfactions that would have allowed to determine all the other prices. Thus, we observe how in a general
equilibrium model all prices are an integrated system; that is, a change in the price of any satisfac- tor or factor affects
all the other prices and quantities of the system (see also the problems 14.2 and 14.3).

The welfare economy

1415 For an economy of many factors, many satisfactions and many people, determine the status of the
Optimal allocation of Pareto A) in the production, B) in the exchange and C) in the
production and exchange
In simultaneously.
A) the status of the Pareto optimal production in an economy of many factors and many satisfactions, is that
The marginal rate of technical substitution between any pair of inputs is the same in the production of all satis- factors
that use both inputs. If this condition is not maintained, the economy could increase its production of one or more
satisfactions without reducing the production of another satisfactor. Aggregate output and a bigger is better than a
smaller production.
B) The condition for the optimal allocation of Pareto in exchange of an economy composed of many satisfac-
Tors and many people is that the marginal rate of substitution between any pair of satisfactions is the same for all the
people who consume them. If this condition is not maintained, could increase the satisfaction or the welfare of one or
more people without reducing the satisfaction or the welfare of other people. This represents an undeniable increase
in social welfare.
( c ) The condition for the optimal allocation of Pareto in the production and exchange in simultaneously in an eco-
Autonomy of many factors, many satisfactions and many people, is that the marginal rate of transformation in the
production is the same as the marginal rate of substitution in consumption for any pair of satisfactions and for each
person who consume both satisfactions. If you do not fulfill this condition, a reorganization of the process of
production-distribution until you give the optimal allocation of Pareto would represent an undeniable increase in social
welfare. Once it reaches the optimal allocation of Pareto, it is not possible to improve to any person without prejudice
at the same time to other. However, note that although the conditions of the optimal allocation of Pareto leading
toward dedistribución of income in particular is better than another. To do this it is necessary to make some ethical
judgments or value on the "merits" relating to different people in the society.
1416 If, in the 1 Re

To
Useful and B3
Recruitment of consumption of the B) What are the points on the curve of the possibilities
 The utility, within and out of it? C) At what point is the economy, simultaneously, in the
Pareto optimal allocation in the production and exchange?
330 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

Figure 14-14 UT
o

Figure 14-15
A) THE POINT C In the C (ON TO1 and B3)
Point D (On To2 and B2), and the point E
Similar. By joining these points, you get the curve of the possibilities of the utility ( FM
Both, the curve of the possibilities of the utility is gets mapping curve of recruitment of consumption of production space to
space of utility.
Note that the scale along the horizontal axis is re To, while the scale along
The vertical axis is re B. That is to say, the numbers along the axs are purely arbitrary in what
Re To

U
That u
B
Requires that you have a form as regular as that shown in the
B) the curve of the possibilities of utility, or border, is the locus of points of maximum utility of a per-
Sona corresponding to any level of utility of the other person. It is therefore the locus of overall balance and the optimal
allocation of Pareto in exchange or consumption. A point inside the curve of the possibilities of
Utility, for example the point H (which corresponds to point H in the
Of satisfactions. In reality, with the X and Y available it is not possible to reach a point as Q in the
C) of all points of the Pareto optimal allocation of exchange along the curve of the possibilities of
Usefulness of the D (which corresponds to point D in the
Pareto optimal allocation in the production; i.e., in the POINT D, (TMSXy)A
14.17 Based on the A) get the curve of possibilities of great utility. B) What represent the
Points on the curve of possibilities of great utility?
To) FM
Of Pareto in the production and exchange. If you choose another point, for example, N on the curve of transformation of
The N) and obtain a curve
Of recruitment of different consumption, traced the point A To Point N

Or
Different consumption, it is possible to obtain another curve of the possibilities of utility ( FN
Another point of the Pareto optimal allocation of production and exchange (in this case, the point T). This process
Can be repeated any number of times. To join after points resulting from the optimal allocation of Pareto
In the production and exchange (such as the D and T), it is possible to obtain the curve of possibilities of great utility G
The on the curve of transformation.
B) the curve of possibilities of great utility or border is the locus of points of the optimal allocation of
Pareto of production and exchange. Therefore, the marginal conditions for the optimal allocation of Pareto
Do not provide a unique solution to the social welfare maximum. Each point on the border of possibilities of
Great utility is re X and
And
Produced), 2) a specific point X
And And or the real income among people A AND B), and 3) a specific point
PROBLEMAS RESOLVED 331

Relevant (i.e., the allocation of L and K between X and Y). The aim of the society is to select from among the
in
Pareto optimal points along the border of possibilities of great utility, that point leading to social welfare maximum.
14.18 Suppose you three functions of social welfare of the map of social welfare of the economy of the
problem 1417
Are represented by the figures in table 14.3. A) Gra
Tran? B) what course it is necessary to
Society of its map of social welfare?

Table 14.3
W W W
1 2 3
U U U U U U
To B To B To B

75 900 150 900 225 975 225 525 300 600 375 675 450 375 525 450 600 525

900 225 900 375 900 450

A) a function of social welfare or social indifference curve shows the various combinations of OrA and uB that pro-
Provide to society the same level of satisfaction or welfare. For example, the points S and D On W2 Dan as
Result the same social welfare. However, the person B is in a better situation at the point S that in the
D, while the person A is in a better situation at the point D than in the S. On the other hand, points
on a
Social welfare function more high include a social welfare greater than the points on a welfare function
Lower social. For example, u A and uB are both larger in point D

Point D are lower than in point D.

B) TO
Utility interpersonal); i.e., since a movement along a curve of social welfare improvement to a person and worsens to
another, for a social welfare function, the society must compare the "merit" of both persons. A dictator can develop a
social welfare function and laugh while a democracy, could develop a social welfare function through the vote,
although only in certain circumstances. In any case, the elaboration of a social welfare function is very difficult. What is
done here is
Simply Assume that the functions of social welfare exist for our society and which are represented by
W1, W2 And W 3 in the

UB UB
900 S 90
0

750 75
D
0
600 D 600 D
450 D W3 3 4503
W
W W
2
300 2

W 300
1 W
150 11
15

G
0
F re 0 15
150 0
i 14-
300 450 600 750 900
U g 16
To u
332 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

14.19 For the economy of the problems 14.17 and 14.18 determine A) the point of
maximum social welfare and B) How-
To occurs of X and Y?; how are distributed these X and Y between A and A. XB, already, YB)?; the value
of uA
B (i.e., X
And UB; what quantity is used of L and K to produce X and Y (i.e., LX, Ly, KX, KY)?, and the value of Px/Py and PL/PK when the economy
reaches its maximum social welfare.
A) if the map of welfare or social indifference of the
14-15, it is possible to determine the point of maximum social welfare, or the "point of restricted happiness."
14-17, this is represented by the point D , where the border of the great utility is tangent to W2, the welfare function
Higher social reachable. The selection of a point on the border of the great utility is basically the choice
A distribution of income in particular. A Departure Point D along the border of the great utility
Increase the welfare of a person, but will reduce the total social welfare. Remember that the conditions of the alloc-
Pareto optimal nation with which they began the study of welfare economics are necessary, but insupara determine the point of
maximum social welfare, since simply
Up to here is the limit where you can reach the Positive Economy . To find the point of happiness is restricted
Required Information Regulations on the values of the society with the
Indifference.
B) THE POINT D (i.e. the point of social welfare maximum) on the border of the great utility corresponds to point D
On the curve of recruitment of consumption and to the point M on the curve of transformation of the
It is now known what quantities of X and Y has to produce that economy with the
Accordingly , it has eliminated the indeterminacy of that spoke to the
Having found the point of maximum social welfare, it is now possible Reverse the order The problems 14.5 to
14.18,
And find that this society must produce 60 X and 70 [see the problem 14.12 To
A)]; X
35 [see the problem 14.12b)]. With X To

The point D of the X

L
(see the problem 1413).
Note that it has now obtained the solution Complete the simple model of overall balance that was
produced and in the process have combined the theories of the production, distribution and consumption, and the value system of
the society. Our simple model also shows that a change in a sector causes changes in all other sectors of the economy, such as
indicated in the study of

1420 Demonstrate that when all markets of our simple economy are perfectly competitive,
Keep the following conditions: A) LK)x

(TMST
(TMSXY)B
A) in Section 6.8 it was observed that in perfect competition, producers selected the amount of L and K in the
form
Such that TMSTLK
Perfect, (TMSTLK)x
B) in Section 4.7 it was observed that in perfect competition, consumers select the amount of X and Y such that
TMSxy
Perfect, (TMSXY)A
C) TMT Xy

The TMT Xy
Thus, CM X/CMy
TMS Xy of A and B is also equal to Px/Py, TMTxy
The results are similar in a perfectly competitive economy of many factors, satisfactions and
People. Accordingly, the perfect competition in all market economy ensures (subject to the Cali tions of the section 14.13)
the Pareto optimal point in the production and distribution. This is the basic argument in favor of perfect competition.

14.21 A) explain why with constant returns to scale and without externalities Do not reach the optimal point-
Mo of Pareto if there is competition Imperfect in some markets within the economy. B) if the government is
able
To make more perfectly competitive markets in the economy, but not all, will you increase the social
welfare?
A) if the industry X is imperfectly competitive, will obtain the production for which CM X
Highest , X is lower and are used less resources than if the industry of X out perfectly competitive. If another

Q
 PROBLEMAS RESOLVED 333

Industry, for example the industry And, it is perfectly competitive, occur where CM And
Therefore, TMTxy
In a similar way if the labor market is perfectly competitive, while the capital market is imperfectly competitive, the
inputs of lower cost or the combination of resources in the production is deter- mined by
PM PM PM
L K L
O
r
,
CMR >PL
P
LK PM P PK
K K
Thus, TMST LK

B) The attempt of the government to make as many markets as possible to behave in a competitive manner, since it does
not
You can achieve that All markets behave competitively may not increase the social welfare. This is the
Conclusion of the "theory of the second best" that is studied in a more advanced course. Of course, even
if a government would succeed in making all markets behave in a competitive manner, it is not likely that this will lead
to the Pareto optimal related with the social welfare maximum. So, theoretically you could use a combi- nation ideal of
global taxs and subsidies (which do not affect the incentives) to restricted.

1422 Explain why the existence of increasing returns to scale may not secure the social welfare
Maximum in a society.
As noted in chapters 9 and 10, the increasing returns to scale over a interval is its large mind productions can lead to
the elimination of perfect competition and to the formation of the oligopoly
Or the monopoly. Since competitors imperfect produce where IM CM > P, occurs very little of the sa-
Tisfactor for the social welfare maximum. However , note that all the conditions for the social welfare maximum is
expressed in terms of edel time in a dynamic world. For example, the monopolists and the oligopolists can use their
long-term gains to research and development, and achieve, with the passage of time, a greater technological progress
and a higher standard of living than in the perfect competition.

1423 Of A) External economy of

production-
Action; B) External economy of consumption; C) external deseconomía
production; D) external deseconomía
Consumption; e) externality technique, and f) public good.
A) A External economy of production Is a bene
The production of any other producer. An example of this is when some producers in the process of increasing
Its production, train more workers, some of whom end up working for other producers.
B) A External economy of consumption Is a bene
In the consumption expenditure of some other consumer. For example, when some consumers increase their
spending on education, in addition to increasing their own salaries, also provide benecomunidad (usually, to become
more responsible citizens).
C) A External deseconomía production is a cost unpaid tax to some producers as a result
The expansion of the production of some other producer. An example of this is when one of the producers in a
locality, to increase its production, causes a high pollution, which increases the cost of eliminating the waste materials
for all producers in the locality.
D) A External deseconomía consumption It is a cost unpaid tax to society by the higher costs of
Consumption of some people. For example, to the extent that more people camped out in the open air is greater than the
number
Cans of beer, cigarette butts and other wastes that are left lying in the forests, so what is needed is a monetary cost
to society (for cleaning) or a psychological costs on other (less satisfaction that occurs when camping).
E) Externality technique is re
Perfect assistance. The cultivation of wheat is a traditional example of a competitive market perfect with the
increasing returns to scale; as a result, large farmers of wheat are pulling out of the market to farmers inde- small
earrings.
F ) a well is called Public good If each unit of it can be used at the same time by more than one person.
Some examples of public goods are the public concerts, Niagara Falls , public schools, and so on.
334 C APÍTULO 14 E GENERAL EQUILIBRIUM AND WELFARE Economics

14.24 A) expresses the conditions of the optimal allocation of Pareto in terms of bene
Private, b) explain why it is not possible to achieve the optimal allocation of Pareto with an external economy
Of production or consumption or with a External deseconomía of production or consumption, or with an
externality
Technical, c) explain why when there are public goods cannot be achieved the optimal allocation of Pareto
Even if you have perfect competition throughout the economy.
A) The Bene (BMS) must be the same as the Marginal social cost (CMS), the
Bene (BMS)
Has to be the same as the Bene (BMP), and Marginal social cost (CMS) must be
the same as the Cost sea-
Private ginal (CMP). The existence of externalities and public goods will not be maintained some of
These conditions and that the economy cannot achieve the optimal allocation of Pareto, even if in each market there
is perfect competition.
B) with only one external economy of production, CMS < CMP P BMP BMS and therefore the economy produces
Very little of the satisfactor to reach a point of the optimal allocation of Pareto. With only one external economy
Of consumption, BMS > BMP CMP CMS and consumes very little satisfactor to achieve an optimum point of
Pareto. With only one external deseconomía production, CMS > CMP P BMP BMS and occurs too
The satisfactor. With only one external deseconomía consumption, BMS < BMP CMP CMS and consumed too-
Oj the satisfactor.
The existence of externalities techniques in a perfectly competitive market leads to A) a war
Economic and the oligopoly or monopoly, or b) A CASE WHERE P CP > CM. In none of the cases it is achieved the point
Pareto optimal, unless the government you pay the company perfectly competitive a grant such that its CM
More the allowance equal to the COP of the company, P CM.
C) Finally, including in perfect competition in any economy, it will not reach a point of the optimal allocation of
Pareto when there are public goods. The reason for this is that if X is a public good in an economy of two satis-
Factors and two people, the economy is in equilibrium when TMT Xy
That both the person As the person B can use each unit of the public good X at the same time, the condition
Balance of the welfare maximum is TMT Xy
Underproduction and to underconsumption of public goods and does not lead to a point of the optimal allocation of Pareto.

1425 With the following information, draw a

Well and and its price and quantity of balance to) if it is a public good and b) if it is not.
QD 3

3P
A and; QD QS
B And
2Py; 2PY,
Where P And is expressed in monetary units.

To) See And when it is a public good,

It is obtained from the sum Vertical curves of the demand for the good And of A and B. This is
expressed by DT in the
DT and Sy, the equilibrium price for the good and is $6 and the amount of balance is 10. This is determined

P And (
$)

16
P And (
$)
10 10
S A
n
d
E SA
n
d
6 E D
6 5.33 T
D
T D
D To
B
PROBLEMAS RESOLVED 335

Through the intersection of DT and Sy in point E in the

Public, people A and B consume, each, 10 units of the same.
B) See And when is a well
Private instead of one public, is obtained by the sum Horizontal demand curves from the good of the people
A AND B. This is determined by D T

Amount of balance is 9. This is determined by the intersection of DT

With PY $6 and QY 10 when the Well And it is a public good (see
That when the Well And it is a private good, the person consumes 2 units and B consumes 7 units of the good
(in com-
Compared with 10 units of the good for each person when and is a public good).

1426 A) explain the difference between public goods and a well supplied by the government and provide
some
Examples. B) What types of public goods can only be provided by the government? C) to explain why the
Public goods give rise to the problem of the stowaway.
A) All goods and services provided by the government are public goods (i.e., are not rival in
The consumption), but not all public goods are, or need to be provided by the government. Those public goods that
are mutually exclusive (i.e., those that can be charged for each user) can provide, and it is often the case, the private
sector. An example of a public good provided by the government that is not exclusion- contributor is the national
defense. An example of a public good exclusive who provide it private companies is a TV program by
cable. An example of a public good which is exclusionary (so that it can provide private companies but that often
provides the government) is garbage collection.
B) The public goods for which there is no exclusion can only be provided by the government. The private companies
Do not provide these goods because they cannot exclude from its use to only those users that do not pay for
them. Generally, the government obtains the necessary funds to pay the public goods that provides establishing im-
posts to the general public. The government can produce the goods or can pay private companies to produce them
(as for example, the greater part of the satisfactions of national defense).
C) the public goods cause the problem of stowaway because each person believes that if you pay or not the part that you
co-
Accounts for the cost of providing them, the government will offer the same quantity of the public good. This causes
Provide a lower amount than necessary for the public good, which prevents reaches the optimal allocation of Pareto
and that required the intervention of the government.