The

The following shows how a benevolent social planner could theoretically achieve the same distribution of income and wealth as would occur from perfectly competitive markets.

From the

Concurrently, by "changing plus to minus or vice versa" for some goods or services, the equations we derive suggest the policy:

**"**__social planner model__" is a__non-competitive market__. Also referred to as the "benevolent dictator" model, those in power decide whether to distribute goods and services as would have occurred in a perfectly competitive market. In real life this level of benevolence rarely happens.The following shows how a benevolent social planner could theoretically achieve the same distribution of income and wealth as would occur from perfectly competitive markets.

From the

**1st and 2nd Welfare Theorems of Economics**and__, we find a suitable reallocation of endowments that suggest an optimal policy:__**models of externalities***do unto others as you would have them do unto you*.Concurrently, by "changing plus to minus or vice versa" for some goods or services, the equations we derive suggest the policy:

*do as they say but not as they do*.__also allows circumstances where "changing a plus to minus or vice versa" in the equations could derive a socially efficient outcome that is not socially equitable. However, this is temporary social efficiency, because without social equity the citizens eventually protest or revolt.__**COASE'S THEOREM****1st and 2nd Welfare Theorems: suitable and unsuitable reallocations of endowments of human rights**

**1st Welfare Theorem**: Setting the ratios of marginal utilities equal to the price ratios of every two goods or services (

*x*,

*y*), and for every pair of consumers (

*U*, Z), reveals that a

**competitive equilibrium is Pareto Efficient.**

**These equations only account for direct consumption.**

**What about indirect consumption?**

Externalities are indirect consumption--someone's smoking can cause you a negative externality, a child's enjoyment of DISNEYWORLD gives the parents positive externalities.

Externalities are indirect consumption--

**The model**

**can still be Pareto Efficient**if setting taxes or transfers equal to the marginal utilities associated with the externalities.

**2nd Welfare Theorem**

A

__Pareto Efficient__outcome is also a competitive equilibrium for a

**suitable reallocation**of endowments.

The

**reallocation of endowments**implied by modeling

**externalties**is competitive equlibrium.

The reallocation is achieved by

**tax and transfer**payments from one economic agent to another.

**UNSUITABLE REALLOCATIONS OF ENDOWMENTS**

Nobel Laureate Ronald Coase surprised social science when he proved that bribes can achieve social efficiency, which is a Pareto Efficient outcome without social equity.

Contrast

**suitable reallocations**with

**unsuitable reallocations**of endowments.

**For example, high ranking officials tend to reduce the rights of the general public to mere privileges, expecting the public to buy their rights via bribes.**This favors the wealthy and politically powerful.

We expect a competitive equilibrium to be stable over time, and reallocations will not be stable if not socially equitable.

***********************************

**COASE'S THEOREM**