Monday, August 8, 2011
What's so wonderful about Pareto efficiency?
'An allocation of resources is Pareto-efficient if it is impossible to re-allocate those resources in such a way as to make one person better off without making another person worse off. This is a proposition of considerable intuitive appeal and one that has proved immensely fruitful, forming the entire basis for welfare economics as the latter is conventionally understood' (J. LeGrand, 'Equity and Choice, 1991 : 1-2). Now, if there are a few rich and many poor, you can't re-allocate to make the poor better off without making the rich worse off. Equally, you can't re-allocate to the rich without making the poor worse off. Aren't both situations Pareto-efficient ? What guidance is Pareto-efficiency supposed to offer ?
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