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Big Ideas in MacroeconomicsA Nontechnical View$
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Kartik B. Athreya

Print publication date: 2013

Print ISBN-13: 9780262019736

Published to MIT Press Scholarship Online: May 2014

DOI: 10.7551/mitpress/9780262019736.001.0001

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Macroeconomists, Efficiency, and Inequality

Macroeconomists, Efficiency, and Inequality

Chapter:
(p.121) 3 Macroeconomists, Efficiency, and Inequality
Source:
Big Ideas in Macroeconomics
Author(s):

Kartik B. Athreya

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262019736.003.0004

Does modern macroeconomics provide a justification for tolerating, or even encouraging, inequality? This chapter describes how economists think about inequality, the role of markets in its creation, and how to deal efficiently with it. It introduces a key result known as the Second Fundamental Theorem of Welfare Economics. This result teaches us about the limits of competitive markets to deliver equitable outcomes. When taxes can be levied prior to any trade, it turns out that any nonwasteful outcome, no matter how equitable, can be delivered using competitive markets. But such taxes are not usually available, so to what extent, in practice, can we have equitable outcomes that are nonwasteful?

Keywords:   Second Welfare Theorem, Gibbard-Satterthwaite Theorem, Mechanism Design, Ex-ante vs. Ex-post efficiency

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