In a debate one person argued that the more equitable is the distribution of income among...

In a debate one person argued that the more equitable is the distribution of income among consumers, the more efficient is the economy in terms of Pareto Optimum (PO).

a. Define and explain “Pareto Optimum”

b. How PO relates to the distribution of income?

c. Explain, how PO can be used to determine misallocation of resources?

d. in a free market, what is the role of the price system in achieving PO solution?

Solutions

Expert Solution

a. Pareto optimum shows that it is impossible to make one person better off without making another person worse off. There is no pareto improvement in pareto optimality. Pareto optimum is an economic state where resources can not be reallocated to make one individual better off without making at least one individual worse off. An economy is to be Pareto Optimum or Pareto Efficient when economy has its resources and goods allocated ti maximum level of efficiency and no change can be made without making someone worse off. b. A Pareto efficient or Pareo optimum economy results in the maximisation of aggregate economic welfare for given distribution of income in the society with given set of consumer preferences. Pareto efficiency is the complete solution of distribution of income. Any change would directly lead to loss in the allocation of resources c. Pareto Optimum is an economic state with given distribution of income and allocation of resource. Any change from Pareto Optimum results misallocation of resource. Any changes in society is impossible to make one person better off without making another person worse off. Pareto efficiency in exchange is when MRS A xy = MRS B xy d. Under free market price system always try to make equilibrium in the market by equalizing demand for resources and supply of resources by society to reach Pareto Efficiency in market. If demand for resources good increases, price will rise to reduce the demand . Then market will be at Pareto Efficient . If supply of resources increases, price will fall to reduce the increased supply to reach Pareto Optimum

Rahul Sunny answered 1 year ago

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