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Lecture

Pareto Efficiency: Social Planner's Problem

In course

FIN-609: Asset Pricing (2011 - 2024)

This course provides an overview of the theory of asset pricing and portfolio choice theory following historical developments in the field and putting emphasis on theoretical models that help our understanding of financial decision making and financial mar ...

Description

This lecture covers Pareto efficiency, social planner's problem, utility functions, security market equilibrium, and complete markets. It explains how sharing rules, linear risk-tolerance, and two-fund separation relate to optimal consumption allocation.

Instructor

Semyon Malamud

Official source

Ontological neighbourhood

Economics

Macroeconomics: Markets

Related concepts (32)

Pareto efficiency

Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engineer and economist, who used the concept in his studies of economic efficiency and income distribution. The following three concepts are closely related: Given an initial situation, a Pareto improvement is a new situation where some agents will gain, and no agents will lose.

Incomplete markets

In economics, incomplete markets are markets in which there does not exist an Arrow–Debreu security for every possible state of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transferring the desired level of wealth among states. An Arrow security purchased or sold at date t is a contract promising to deliver one unit of income in one of the possible contingencies which can occur at date t + 1.

Allocative efficiency

Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, the set of outputs is chosen so as to maximize the wellbeing of society. This is achieved if every good or service is produced up until the last unit provides a marginal benefit to consumers equal to the marginal cost of production. In economics, allocative efficiency entails production at the point on the production possibilities frontier that is optimal for society.

Lecture

A lecture (from lēctūra ) is an oral presentation intended to present information or teach people about a particular subject, for example by a university or college teacher. Lectures are used to convey critical information, history, background, theories, and equations. A politician's speech, a minister's sermon, or even a business person's sales presentation may be similar in form to a lecture. Usually the lecturer will stand at the front of the room and recite information relevant to the lecture's content.

Σ-algebra

In mathematical analysis and in probability theory, a σ-algebra (also σ-field) on a set X is a nonempty collection Σ of subsets of X closed under complement, countable unions, and countable intersections. The ordered pair is called a measurable space. The σ-algebras are a subset of the set algebras; elements of the latter only need to be closed under the union or intersection of finitely many subsets, which is a weaker condition.

Related lectures (53)

Equilibrium State Prices Determination

Explains the determination of equilibrium state prices in asset pricing through consumption market clearing and budget constraints.

Pareto Efficiency and Social Welfare

Explores Pareto efficiency, social welfare, and asset pricing optimization in complete and incomplete markets.

Asset Pricing: Equilibrium and Pareto Optimality

Explores equilibrium and Pareto optimality in asset pricing theory, emphasizing market equilibrium conditions and welfare theorems.

Expected Utility and Risk-Aversion

Explores expected utility theory, risk-aversion, utility functions, and decision-making under uncertainty.

Asset Pricing: Utility Functions and Risk Management

Explores utility functions and risk management in asset pricing under uncertainty.

Related concepts (32)

Pareto efficiency

Incomplete markets

Allocative efficiency

Lecture

Σ-algebra