Evaluating Equilibria and Externalities
In Non-Strategic Decisions in Multi-Agent Environments, we tested an agent's ability to reason about equilibrium prices and quantities arising from supply and demand decisions in a non-strategic setting. Although preferences were reflected in the underlying supply and demand functions themselves (i.e., utility maximization in the consumption decisions of Consumption Decisions in Non-Strategic Environments and profit maximization in the production decisions of Production Decisions in Non-Strategic Environments), the equilibria in Non-Strategic Decisions in Multi-Agent Environments do not necessarily reflect broader social preferences.
However, we can still ask whether the resulting “allocations” (i.e., the physical goods produced and how they are distributed to individuals, the amount of hours worked, and the physical capital installed) from the “invisible hand” in Non-Strategic Decisions in Multi-Agent Environments compare to alternative ways of allocating resources which may directly take social preferences into account. A central result of economics in non-strategic settings is that absent market imperfections and market power (i.e., when self-interested agents cannot directly manipulate prices because they are too small) the competitive equilibria of Non-Strategic Decisions in Multi-Agent Environments typically yields the same allocations a benevolent planner might choose.
In this section, we consider how a social planner would evaluate the underlying welfare, efficiency, and inequality that comes about in non-strategic equilibria with prices derived from equating supply and demand. This leads to testing the ability of the agent to evaluate Pareto efficiency, consider the welfare theorems, evaluate Pigouvian externalities, and weigh the welfare impact of various market interventions which change the equilibria derived in Non-Strategic Decisions in Multi-Agent Environments.
Modules
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5.1Welfare and Decentralization
In this section, we test whether the agent can determine cases where the competitive equilibrium they calculate would yield the same distribution of resources and consumer welfare as that of a benevolent social planner directly making the consumption and production decisions of all agents directly (also known as the “Welfare Theorems”).
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5.2Welfare Analysis of Market Equilibrium
In this section, we focus on the agent's ability to evaluate welfare implications of various forms of market equilibrium, particularly how different policies and distortions impact overall efficiency and resource allocation.