Question

“Rational individuals always achieve Pareto-efficient outcomes.” Discuss the statement in the context of game theory. Is the statement correct?

Answer 1

Rational individuals always achieve pareto efficiency

An Italian engineer and economist named Vilfredo Pareto had developed this concept. Pareto efficiency can also be termed as Pareto optimality. It is a state where resources are allocated after which reallocation is impossible. This is done to make any criteria or any one individual better off without making any other criteria or individual worse off.

It is a socially optimal outcome which is achieved by a perfectly competitive market. When an economy is perfectly competitive and in a state of static general equilibrium then it is said to be in Pareto optimal condition. The economic values of a market is reflected by the prices . if greater satisfaction is got by the units of goods and services in some activities than the present use, then price will be bid up by someone and there would be new price attraction.

The marginal revenue product , the opportunity cost and the price of a resource will be equal when the system of the price will be in equilibrium. The productive use and the consumption use is at its best of each and every unit of goods and services. There would be no greater output or satisfaction with the transfer of resources. There are three criteria for a market equilibrium to result in Pareto optimality. They are:

1. exchange efficiency- it occurs when a bundle of goods is not possible to redistribute such that the welfare or utility of a consumer is raised without affecting the other comsumers.

b. production efficiency – this occurs when the factors of production are allocated in such a way the they cannot be reallocated again to raise the output of one product without affecting the output of the other.

  c. output efficiency – it occurs where there are no alternative combination of product s which are produced to raise the welfare of one consumer without affecting other consumers.