Answer to Question #50483 in Microeconomics for nidhi
Discuss the approaches adopted by Pigou and Pareto for analyzing the problem of welfare economics
A. Pigou in the book " The Economics of Welfare" (1932) coined the concept of social indicators (economic) well-being. He introduced the quality of life indicators - environmental conditions, recreation, access to education, public order, health care and more. He believed that the optimum well-being is possible only if state interventions in the process of resources usage and income distribution and emphasized that economic prosperity is is not interchangeable with the general welfare, as it doesn’t contain such elements as environment, the relationship between people, housing, public order. A. Pigou devoted considerable attention to income redistribution from rich to poor - transfer income. Pareto in his "Manual of Political Economy" (1906) not only rejected quantitative utility. He believed that the only changes that can be evaluated are the ones that make all either good or evil, or the ones that make the best at least for one person and don’t make worse for anyone else. Pareto formulated the principle according to which the maximum prosperity is achieved with optimal resource allocation, if any redistribution does not increase their usefulness in society. Improvement according to Pareto is such distribution of resources when the welfare of some people does not worsen the welfare of others. He was looking for sources of social welfare in public finance, believing that through fiscal policies state is to enforce certain ethical democratic ideals.
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Bring out the salient features of Ramsey model for decentralized households (your answer should include the assumptions, important equations, phase diagram and its interpretation). In what respect is it different from the Solow model?