Question

Amy and Lela have following preferences for apples, pears and bananas where > means "preferred to."

Amy: apple > pear > banana

Lela: banana > apple > pear

Assume there is one apple, one banana and one pear to divide between Amy and Lela and that they have no other goods. For each of the following allocations, say whether it is (Pareto) efficient or inefficient.

1. Amy gets the apple and the pear and Lela gets the banana                             [ Select ]                       ["Efficient", "Inefficient"]      

2. Amy gets the banana and Lela gets the apple and the pear                             [ Select ]                       ["Efficient", "Inefficient"]      

3. Amy gets the pear, apple and banana and Lela gets nothing                             [ Select ]                       ["Efficient", "Inefficient"]      

Answer 1

Pareto efficiency, or Pareto optimality, is an economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off. Pareto efficiency implies that resources are allocated in the most economically efficient manner, but does not imply equality or fairness.

So according to the definition and the preferences given above we can easily say whether the given allocation is pareto efficient or not.

1. Amy gets the apple and the pear and Lela gets the banana : This allocation is Efficient as Amy prefers apple and Lela prefers banana, now for pear it is Amy's second preference so he must get it.

2. Amy gets the banana and Lela gets the apple and the pear : This allocation is inefficient because Lela prefers banana but Amy gets it, so if it is given to Lela it will increase overall welfare without decreasing canyons.

3. Amy gets the pear, apple and banana and Lela gets nothing: This is also inefficient as banana is more useful to Lela and hence if it is given to Lela it will increase overall welfare.