Question

The concept of Pareto efficiency is not controversial and is a useful tool to evaluate tax policies. Explain the idea of Pareto efficiency and whether or not you agree with this statement.

Answer 1

The concept of Pareto efficiency is named after the Italian engineer and economist,Vilfredo Pareto,who used the concept in his studies of economic efficiency and income distribution.

In neoclassical economic,a Pareto efficient outcome is an action that harms no one and helps at least one person.

*A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.

• The production possibility Curve can be used to illustrate the concept of Pareto efficiency and Pareto improvement in welfare.

• Pareto efficiency will occur on points that lie on a production possibility Frontier/ curve.

• when an economy is operating on a production possibility curve,it is not possible to increase output of goods without reducing output of services.

• when an economy lies well within the PPF boundary and there is an inefficient use of resources or under utilisation of resources

Explanation of Image:-

*All points that lie on a product production possibility curve are Pareto efficient for example combination shown at points A and B.

*Producing more commudity 2 involves making a sacrifice of commudity 1 example there is an opportunity cost.

*points that lie within the PPC show an inefficient or under-utilization of resources -this is pareto inefficient.

*A pareto improvement means that output of both products can increase as we move from within the PPC to points on the PPC boundary.

Pareto efficiency and equity:-

An outcome may be a Pareto improvement but it doesn't always mean this is a satisfactory outcome or fair.

There could still be inequality after a pareto improvements.

we need to see which group people benefit from increased output of good and services.

Showing on a diagram a parrot improvement involves no judgement about the equality of final distribution or overall social welfare.