Question

1. A. Define Pareto improvement. Using Vilfredo Pareto’s criteria, how can we confirm that a Pareto improvement has taken place? Give one brief example.

B. Define Pareto efficiency Using Vilfredo Pareto’s criteria, how can we confirm that we have Pareto efficiency? Give one brief example.

C, D. In Ontario, Canada sales tax is 14%. Personal income taxes also are higher than in the US. Their higher sales tax and income tax funds government guaranteed medical care. Separately answering as parts C and D, give and explain two different reasons why their medical funding methods are contrary to the objectives of Vilfredo Pareto. (note: This question asks for Pareto’s reasoning, not your own.)

Answer 1

For example,

Mary is having a sleepover at her house. She has invited three of her closest friends: Liza, Tia, and Jo. The four girls get hungry, so Mary's mother orders them a large pizza. Not wanting to appear greedy, the girls allow Mary to decide how the pizza should be divided among the four of them. Since the pizza comes in eight slices, Mary decides that it would be best if all of the girls received two slices of pizza. The way in which the pizza was divided is an example of Pareto efficiency.

Pareto Efficiency Defined and Examples

Pareto efficiency refers to allocating resources in such a way that it is not possible to improve one individual's lot without impairing the lot of at least one other individual. The concept is named after Italian economist, Vilfredo Pareto. Pareto efficiency originated from Pareto's study income distribution and economic efficiency.

Pareto efficiency is first and foremost an economic concept; it is not concerned with equality or fairness. It is possible to reach Pareto efficiency, but also have great inequality. If we look at the example with the pizza, as long as there was no leftover pizza, we would have achieved Pareto efficiency no matter how it was divided. Let's say Mary and Jo decided to split the pizza in half and not give any to Liza or Tia. Even though two girls are missing out on pizza, this is still Pareto efficiency because there is no way to make another girl better off (by giving her pizza) without making either Mary or Jo worse (by taking pizza away).

Suppose all four girls chip in $5 for the pizza to make things fair. Once the pizza makes it to the house, Mary decides to keep all of the pizza for herself and gobbles it up before anyone else can have a slice. Though it is far from fair, this too is Pareto efficiency since we cannot make another girl better off without making Mary suffer.

Let's say Mary keeps the entire pizza for herself, but only eats five of eight slices because she was full. This is not Pareto efficiency, since it is possible to improve the other girls' situation (by giving them the remaining slices of pizza) without hurting Mary since her five slices were all that she needed. Suppose that Liza, Jo, and Tia each received one of the three remaining slices. This is known as Pareto improvement. Pareto improvement occurs when a person's situation can be improved without making the situation worse for another person.