Question

When we conducted normative analyses of economic allocations through markets in our models, we often compared their welfare outcomes against a benchmark of a Pareto efficient planner. Let's take the concept of our Modified Golden Rule for example. Which of these statements are most correct?

1. There is a unique Pareto efficient planning problem. Hence it is a useful benchmark.
2. The notion of Pareto efficiency is not free from subjective value judgments.
3. There is an infinite set of possible Pareto planners in the Overlapping Generations Model's notion of a Modified Golden Rule.
4. Pareto efficiency is a cosmic, karmic concept.
5. There is more than one correct answer

Answer 1

Option 1: correct

Take an example of a firm manufacturing 2 products. If the firms want to effectively allocate the production output of these 2 products, they need to deploy the concept of pareto efficiency. This concept enables the firm to judge the best allocation without compromising on any of the products. And this are a set of unique values for the firm, ceteris Paribus. Therefore this acts as a benchmark for the most efficient allocation.

Option 2: False

The pareto efficiency accounts for all the possible resource allocations taking into consideration the needs of the firm. Therefore subjective values are covered well in this. That's the very reason the notion of pareto efficiency says. A change at a pareto efficient state will be worse off for the other product.

Option 3: True

We call this the infinite Horizon case. In a normal golden rule, steady states with capital flows above the specified in this rule are not pareto optimal. That was one of the reasons the modified golden rule was made.

Option 4: False

Pareto efficiency is an economic concept which purely depends on the production constraints and the revenues associated. There is no room for cosmos or luck to favor the existence of such a concept.

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