6.
Consider the utility possibility frontier for a two person economy. Two representative
social indifference curves are illustrated.
(a)
Which of the four labelled utility distributions for this economy (F, B, P, and Z) are
Pareto efficient?
(b)
Suppose the economy is at point Z. Does this outcome maximize social welfare? Why or
why not?
(c)
Suppose the economy is initially at point P as a result of a market failure in the economy.
The government intervenes and corrects the market failure which moves the economy to
point F. Discuss the efficiency and equity (social welfare) implications of the
government's intervention in the economy.
(d) Suppose the economy is initially at point Z but the government uses taxes Jack in order to
transfer some utility to Jill, moving the economy to B. Given this information, what can
you determine about whether government taxes and transfers are distorting or non-
distorting?
Utility of Jill
F
P
B
Z
UPF
SIC1
SIC2
Utility of Jack
