Microeconomic Theory & Welfare Criteria

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Abstractions about consumer choice and welfare in microeconomic theory, including classifications of goods by how they are valued or evaluated (composite good, experience good, positional good), formal results linking demand and welfare (Roy's identity, feasibility condition, theory of the second best), and normative criteria for aggregating welfare (Nash welfare rule, wealth maximization, Greenwald-Stiglitz theorem).

13 abstractions in this family — domain-specific abstractions that sit near one another in structural-signature space (k-means over structural-signature embeddings). Each is shown with its short description.

• Budget-Feasible Mechanism — In mechanism design, a branch of economics, a budget-feasible mechanism is a mechanism in which the total payment made by the auctioneer is upper-bounded by a fixed pre-specified budget.
• Composite Good — In economics, a composite good is an abstraction that represents all but one of the goods in the relevant budget.
• Experience Good — An experience good is a product or service whose relevant quality can be evaluated accurately only after it has been purchased and experienced.
• Feasibility condition — The feasibility condition is a fundamental concept in microeconomics used in conjunction with the tangency condition to solve the consumer choice problem and derive the demand function.
• Greenwald-Stiglitz theorem — The Greenwald-Stiglitz theorem shows that an economy with externalities or distortions associated with imperfect information and incomplete markets is in general not constrained Pareto optimal, and there exist government interventions such as taxes and subsidies to make a Pareto improvement.
• Hahn's problem — Hahn's problem (or Hahn's question) refers to the theoretical challenge of building general equilibrium models where money does not enter preferences, yet has a positive equilibrium value.
• Impossibility of performance — The doctrine or principle of impossibility, impossibility of performance or impossibility of performance of contract is a doctrine in contract law, and in this context, the "impossibility defense" is a defense offered against a claim for nonperformance.
• Nash welfare rule — The Nash welfare rule is often described as a compromise between the utilitarian rule, which maximizes the sum of utilities and emphasizes aggregate efficiency, and the egalitarian rule, which maximizes the minimum utility and emphasizes the worst-off individual.
• Positional good — Positional goods are goods valued only by how they are distributed among the population, not by how many of them there are available in total (as would be the case with other consumer goods).
• Roy's identity — Roy's identity (named after French economist René Roy) is a major result in microeconomics having applications in consumer choice and the theory of the firm.
• Substitution bias — Consider how consumer expenditures are reflected in a consumer price index.
• Theory of the second best — A common misinterpretation of the theory, sometimes termed the fallacy of exhaustive effort, is the assumption that when one optimality condition cannot be satisfied, satisfying as many of the remaining conditions as possible must yield the second-best outcome.
• Wealth maximization — Wealth maximization is a normative principle in welfare economics that seeks to maximize the total “economic surplus” in society by summing individuals’ willingness to pay for desired goods, services, or states of affairs.