Models of Endogenous Growth
The first, and simplest, approach to modelling endogenous growth, the AK model, assumes that capital is the only input into production and that there are constant returns to scale. This may seem at first sight to simply remove the problem of decreasing returns by assumption, but we will later show that the AK model can be given a broader interpretation. Under these assumptions the production function is given by Yt AKt, hence the model's name. Constant returns to scale ensures that output grows...
Introduction Afo
A social welfare function permits the evaluation of economic policies that cause redistribution between consumers - a task that Pareto efficiency can never accomplish. Although the concept of a social welfare function is a simple one, previous chapters have identified numerous difficulties on the path between individual utility and aggregate social welfare. The essence of these difficulties is that if the individual utility function corresponds with what is theoretically acceptable, then its...
Optimality and Efficiency 2141 The Golden Rule
The central message of the previous section was that the competitive equilibrium would occur at some point on the consumption possibility frontier. The consumer's preferences, in conjunction with the production function, will determine precisely which point this is. Having reached this conclusion, it is now possible to determine whether any of the points on the frontier are preferable to others. To do this it is first necessary to clarify in what sense one point can be preferable to another. In...
Normalizations and Walras Law
Two points now need to be made that are important for understanding the functioning of the model. These concern the number of prices that can be determined and the number of independent equilibrium equations. In the equilibrium conditions 6.7 there are two equations to be satisfied by the two equilibrium prices. It is now argued that the model can determine only the ratio of prices and not the actual prices. Accepting this, we would seem to be in a position where there is one price ratio...
Equilibrium
In an equilibrium of the economy, supply is equal to demand. This is assumed to be achieved via the adjustment of prices. The prices at which supply is equal to demand are called equilibrium prices. How such prices are arrived at will be discussed later. For the present, the focus will be placed on the nature of equilibrium and its properties. The consumer choices shown in Figure 6.2 do not constitute an equilibrium for the economy. This can be seen by summing the demands and comparing these to...
Scope
This book is essentially an introduction to the theory of public economics. It presents a unified view of this theory and introduces the most significant results of the analysis. As such, it provides a broad review of what constitutes the present state of public economics. What will not be found in the book are many details of actual institutions for the collection of taxes or discussion of existing tax codes and other economic policies though we do present relevant data where it illuminates...
Analyzing Policy
The method of policy analysis in public economics is to build a model of the economy and to find its equilibrium. The positive aspect of policy analysis determines the effect of a policy by tracing through the ways in which it changes the equilibrium of the economy relative to some status quo. Alternative policies are contrasted by comparing the equilibria to which they lead. In conducting the assessment of policy, it is often helpful to emphasize the distinction between positive and normative...