Core Course 8: Intermediate Microeconomics-II
This course extends microeconomic analysis to economy-wide equilibrium, efficiency, and instances where markets fail to deliver optimal outcomes.
Course Content Details
1. General Equilibrium and Efficiency
This unit moves beyond the analysis of a single market (partial equilibrium) to consider how all markets in an economy interact and reach equilibrium simultaneously (general equilibrium). We use the Edgeworth Box framework to analyze exchange between individuals and to define the concept of Pareto efficiency, an allocation where no one can be made better off without making someone else worse off.
Key Topics:
- The Edgeworth Box and Pareto Efficiency in Exchange
- The Contract Curve
- General Equilibrium in a Pure Exchange Economy
- Efficiency in Production
2. Welfare Economics and the Fundamental Theorems
This unit explores the relationship between competitive markets and social welfare. We will study the two Fundamental Theorems of Welfare Economics. The First Theorem states that a competitive equilibrium is Pareto efficient. The Second Theorem states that any Pareto efficient allocation can be achieved as a competitive equilibrium with appropriate initial endowments. We will also discuss different social welfare functions for evaluating allocations.
Key Topics:
- The First Fundamental Theorem of Welfare Economics
- The Second Fundamental Theorem of Welfare Economics
- Social Welfare Functions (Utilitarian, Rawlsian)
- The Theory of the Second Best
3. Market Failure: Externalities and Public Goods
While competitive markets can be efficient, they sometimes fail. This unit examines two major sources of market failure. Externalities occur when the actions of one agent affect others, but this effect is not reflected in market prices (e.g., pollution). Public goods are non-rival and non-excludable (e.g., national defense), leading to under-provision by the market. We analyze potential solutions to these problems.
Key Topics:
- Negative and Positive Externalities
- The Coase Theorem
- Pigouvian Taxes and Subsidies
- Characteristics of Public Goods: Non-rivalry and Non-excludability
- The Free-Rider Problem
4. Asymmetric Information (Adverse Selection and Moral Hazard)
This unit explores market failures arising from asymmetric information, where one party in a transaction has more or better information than the other. We will study adverse selection, where hidden characteristics lead to problems (e.g., the market for "lemons"). We will also analyze moral hazard, where hidden actions lead to problems (e.g., the principal-agent problem). Potential solutions like screening and signaling are discussed.
Key Topics:
- Adverse Selection and the Market for Lemons
- Signaling and Screening as Responses to Adverse Selection
- Moral Hazard and the Principal-Agent Problem
- Incentive Contracts