Finance:Community indifference curve

A community indifference curve is an illustration of different combinations of commodity quantities that would bring a whole community the same level of utility. The model can be used to describe any community, such as a town or an entire nation. In a community indifference curve, the indifference curves of all those individuals are aggregated and held at an equal and constant level of utility.

History

Invented by Tibor Scitovsky, a Hungarian born economist, in 1941.

Solving for a CIC

A community indifference curve (CIC) provides the set of all aggregate endowments $(\overline{x},\overline{y})=(x_1+x_2,y_1,+y_2)$ needed to achieve a given distribution of utilities, $(\overline{u_1},\overline{u_2})$. The community indifference curve can be found by solving for the following minimization problem:

$\min \overline{y}\text{ s.t. }{U}_1(x_1,y_1)\ge \overline{u_1}\text{ and }{U}_2(\overline{x},\overline{y}-1)\ge \overline{u_2}$

CICs assume allocative efficiency amongst members of the community. Allocative Efficiency provides that $MR{S}_{1}xy=MR{S}_{2}xy$. The CIC comes from solving for $\overline{y}$ in terms of $\overline{x}$, $y_{cic}(\overline{x})$.

Community indifference curves are an aggregate of individual indifference curves.

See also

• Indifference curve

References

Albouy, David. "Welfare Economics with a Full Production Economy." Economics 481. Fall 2007.

Deardorff's Glossary of International Economics.