Question

Short Questions Please indicate whether the following statements are True, False or Uncertain. Support your answer with an explanation (one to two sentences) or a diagram (75% of credit is based on your explanation!) 1. The government should only intervene in the economy when there are market failures. [2 marks 2. A utilitarian social welfare function implies that income redistribution from rich to poor will reduce social welfare. [2 marks] 3. A policy intervation will increase social welfare if and only if it is a Pareto improvement. [2 marks 4. If the benefits of a project exceed its cost, then realizing this project will be a Pareto improve- ment? [2 marks

Answer 1

1. True. In case of market failure mainly seen in case of public goods, externalities etc the private sector does not enter the market because it makes losses in this case. Thus, government intervention is needed in such cases where there is failure of private sector to provide the good because government concentrates on social welfare rather than profit maximization.

2. False. A utilitarian social welfare function implies that income redistribution fro rich to poorer section in the economy leads to increase in social welfare because it helps in reduction of inequality in the society and thus increases overall social welfare.

3. True. Pareto improvement means reallocation of goods in such a manner that atleast one person is better off and no one is worse off. Thus, to increase social welfare policy intervention has to be Pareto improvement.

4. False. It depends on the section of the society which is benefited by the change in the allocation of the resources.

Answer 2

ANSWERS :

1. True .

Government should not intervene in the economy. Let the market forces decide the economy. However if there are market failures or economy is not on the right path, government should act and take corrective measures for economy to stabilise and grow.

2. False.

It is the other way. Utilitarian social welfare means income distribution from rich to poor through social welfare projects and schemes.

3. True

Pareto improvement  aims to maximise the social welfare so that every one is benefitted. No one can be better off without making someone worse off.

4. False.

If a project has benefits more than costs, it may be profitable and beneficial to some section of the society. It is not necessarily beneficial to all, hence not a Pareto improvement.