Question

What is a Pareto efficiency of allocations resulting from barter or market exchange?

Answer 1

Pareto efficiency of allocations means that a state of allocation where one individual cannot be made better off without making another individual worse off. In case of barter , as we know there is exchange of commodities . So the pareto efficiency is shown with the example below.

Suppose that the 2 individuals have endowments as (e1,e2) ie these were the resources or goods available to them when they entered the market.

Now suppose after the market exchange or barter the allocation becomes (x1,x2). So as long as the allocation we got after the barter or market trade is making the individuals better off if every individual is at least as well off with (x 1 , x 2 ) as was with (e1 , e2 ) and at least one individual is strictly better off , then we say that (x1,x2) is pareto optimal than (e1,e2) and the pareto optimal or efficient allocation is received. In other words at (x1,x2) ,at any other allocation from here , we cannot make one individual better off without making another one worse off.

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