In this course the most important (micro-)economic concepts for an investigation of the role of the state in a market economy are presented. The main focus is on normative analysis. The predominant criteria for an assessment of the outcome of an economy are defined (in particular, the Pareto-criterion, but also other criteria represented by social welfare functions). Moreover, working with a theoretical model of an economy it is analysed, to which extent a pure market economy satisfies these criteria, and, more generally, what are the consequences of government activities.

I. Introduction

II. Pareto-optimality in a market economy

II.1. The basic model on an economy
II.2. Pareto-efficient allocations
II.3. Conditions for a Pareto-optimal use of goods and resources
II.3.A. Efficient exchange
II.3.B. Efficient production
II.3.C. Efficient structure of production - coordination of production and consumption
II.4. Pareto-efficiency of a general equilibrium of a market economy
II.5. Remarks and extensions

Appendix II.A. The marginal rate of transformation

Appendix II.B. General equilibrium

III. Ranking Pareto-incomparable allocations

III.1. Compensation Principle
III.2. Social Welfare Functions
III.2.1. Definition
III.2.2. Types of Social Welfare Function
III.2.3. Remarks

IV. Social Choice Theory

IV.1. Introduction
IV.2. Social choice and public choice

V. Measuring individual welfare changes

V.1. Consumer surplus with more than one good
V.2. Compensating variation, equivalent variation, consumer surplus VI. Pareto-efficiency in an economy with a collective good

VI. Pareto-efficiency in an economy with a collective good

VI.1. The Samuelson-condition
VI.2. Pareto-efficiency of the Lindahl equilibrium

VII. Aspects of behavioral economics and their consequences for welfare economics

VII.1. Introduction
VII.2. The savings decision
VII.3. Further aspects

Jehle, G. A. and P. J. Reny (2011), Advanced Microeconomic Theory, Third edition, Pearson Education Ltd, chs. 4 – 6.

Mas-Colell A., M. D. Whinston and J. R. Green (1995), Microeconomic Theory, Oxford University Press, chs. 10, 15, 16,19, 20, 22.

Johansson, P.-O. (1991), An introduction to modern welfare economics, Cambridge University Press, chs. 1 – 4.