Economics and Ethics

Less demanding, compared to utlitarianism
central to welfare economics (THE central concept)

Welfare economics: inverstigation of methods to obtain a social ordering over possible states of the world based only on utility information

social ordering: comparison of all states of the world that permits one to rankeach one as "better than", ,"worse than" or "equally good as" as every other --> implies moral judgements!

state of the world: a complete description of variables of interest

welfare economics assumes welfarism: one need only information about individual utility

utility functions assign numbers to states (allocations of goods or money)

two ways of interpretation:
1. cardinal: mnumerical differences in utility matter
2. ordinal: only order or ranking of states matter

Interpersonal comparability of utilities: Needed to max. total utility
Cardinal utility: needed to rank different states across individuals

Economists prefer weaker assumption:
Avoid interpersonal comparison
Prefer ordinal over cardinal utility

Efficiency requires only ordinal utility

efficiency involve two additional value judgements
1. Individualism: preference satisfaction: social orderings should be based on individual orderings / raionality
2. pareto principle

Weak informational requirements
-only an ordinal ranking of individual preferences over states of the world is required
-interpersonal comparison of utility are also not necessary

The pareto criterion liberated normatve economics from utilitarianism

1. pareto optimum is not unique

2. Incompletness of pareto principle: cannot rank all states, even some efficient states over inefficient

3. strong ethical assumptions: indifference to distributional issues; conservations of no-harm principle

4. relevance; few real world situations with no losers

Partial equilibrium analysis: studies individual markets
Genreal equilibrium analysis: studies all markets and agents in the economy simutaneously
Pure exchange economy: no production
Standard preferences: indifference curves are non-intersecting, negativley sloped, dense, convex and monotonic