Question

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 partsC and D, give and explaintwo 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

A)

One of the founders of economics as a modern science, Vilfredo Pareto's work deals with the concept of utility, more specifically, marginal utility and the collective maximization of such; thus his work is of great interest to the theory and study of welfare economics.^[1] Pareto's work spans a variety of studies from welfare economics to political economy to legal economics and others.
There are two main theories within his works collectively referred to as Pareto Principles:

1. Pareto improvement
2. Pareto efficiency or Pareto Optimization

Pareto Improvement

Pareto improvement is a condition on the way to Pareto efficiency whereby goods can be re-allocated to make at least one person better off without making any other individual worse off. Pareto improving behavior, in theory, will continue until Pareto efficiency is reached.^[2]

Individual	Initial Allocation	Initial Utility Level	New Allocation	New Utility Level
Person 1	Good A	x	Good C	x +1
Person 2	Good B	x	Good A	x
Person 3	Good C	x	Good B	x

All three individuals started at the same level of utility, x, after the re-allocation the utility of Person 1 increased to x+1 and the others remained the same. This is a Pareto improving allocation because no one individual was made worse off, in a Pareto efficient model, this is not possible. So, if a system is not Pareto efficient, it means that there is room for Pareto improvements to be made. The goal of Pareto improvement is to distribute goods in such a way that everyone is "happy" or "satisfied" and to reach a Pareto efficient state in order to prevent market failure.

An example of a Pareto improvement would be if a group of people did not have electricity but overtime were able to install a small solar farm which brought electricity to their village. The electricity would allow the village to cook and heat their homes with electricity instead of charcoal which has harmful effects on the respiratory systems of the users. Assuming the electricity is accessible to everyone and the farm does not interfere with anyone in the village, it would be a Pareto improvement because the village is made better off without anyone being made worse off. See access to electricity and access to non-solid fuels for more on the effects of this.

B)

The concept of Pareto efficiency was developed by Italian economist, Vilfredo Pareto. Learn more about Pareto efficiency from examples. Once you are finished, test your knowledge with a quiz.

Introduction

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. In this example, the situation of all three girls (Liza, Jo, and Tia) can be improved without worsening Mary's situation (Mary held all of the pizza) or each other's since they never had pizza to begin with. People should aim to make Pareto improvements until it becomes impossible to make further changes without making someone else worse off. Pareto efficiency is obtained when no more Pareto improvements are possible.