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Ram Singh
Course 001
Question
1 What is a fair allocation?
2 Is a ‘fair’ allocation also an efficient allocation?
3 Is a ‘fair’ allocation Pareto efficient?
4 Does a competitive market lead to ‘fair’ allocations?
Definition
Allocation x = (x1 , ..., xn ) is ‘Fair’ if it is equal division of endowments. That is,
if " PN i #
e
(∀i, j ∈ N) xi = xj = i=1 .
N
Definition
Allocation x = (x1 , ..., xn ) is ‘Fair’ if it is Non-envious/envy-free. That is, if
Theorem
An allocation x̂ = (x̂1 , ..., x̂I ) is PO iff: For some utility levels Ū 2 , ..., Ū I ,
x̂ = (x̂1 , ..., x̂I ) is a solution of the following
max {u 1 (x1 )}
x1 ,...,xI
s.t. xi ≥ 0, and
Question
1 Is an ‘Equal division’ allocation ‘Non-envious’ ?
2 Is a Non-envious allocation also an Equal division allocation?
3 Is an ‘Equal division’ allocation Pareto Efficient?
4 Is a Non-envious allocation Pareto Efficient?
u 1 = 3x1 + 2y1 + z1
u 2 = 2x2 + y2 + 3z2
u 3 = x1 + 3y1 + 2z1
e1 = e2 = e3 = (1, 1, 1)
Clearly
y1
MRS1 =
x1
y2 ȳ − y1
MRS2 = =
x2 x̄ − x1
Question
Is fair (equal) division of endowments a P.O allocation?
Question
Is competitive equilibrium allocation fair?
Proposition
When preferences are strongly monotonic and initial allocation is ‘Equal’, the
competitive equilibrium is fair (non-envious)
Question
Does an increase in endowment make the person better off?
From (1)
p∗
∂( p1∗ ) (αȳ1 + β ȳ2 )(1 − α)
2
=− < 0.
∂ x̄1 [(1 − α)x̄1 + (1 − β)x̄2 ]2
∂x1∗ (1 − α)
= α + ȳ1 >0
∂ x̄1 [(αȳ1 + β ȳ2 )]
∂y1∗ (αȳ1 + β ȳ2 )(1 − β)x̄2
= (1 − α) >0
∂ x̄1 [(1 − α)x̄1 + (1 − β)x̄2 ]2
∂x2∗ (1 − α)
= β ȳ2 >0
∂ x̄1 (αȳ1 + β ȳ2 )
∂y2∗ (1 − α)(αȳ1 + β ȳ2 )
= −x̄2 (1 − β) <0
∂ x̄1 [(1 − α)x̄1 + (1 − β)x̄2 ]2