Question

The enrollment for ECON 290 exceeds the spaces available. Some students who need to take this course to graduate are unable to get a space even though others who are taking it as an elective do get a space.

a) Is this situation allocatively efficient? Briefly explain.

b) Is this situation Pareto efficient? Why or why not? Briefly explain. If it is not efficient, what action would make a Pareto improvement?

Answer 1

a) This is not allocatively efficient. This is because the course should have been allocated such that the people for whom it is a graduate subject should have been allocated first and the electives should have been allocated later.

On the other hand here, the electives are getting a space while the ones who need it to graduate are not. Hence it is not allocatively efficient.

b) Pareto efficiency is when one is made better off without making someone else worse off. This is not efficient because here the one who values the course somewhat less than the ones who value it more are able to get it. In other words, the ones who need it to graduate would have attached a higher value to the subject or the course, than the ones for whom the subject would just be an elective.

For pareto improvement, trading takes place. In this case also the trading could take place wherein the students who are electives or value the course less than the others ie are indifferent between certain courses can trade with students who would be better off after getting a seat in this course. This way the elective student might be at a better place or be indifferent and the graduate student would be better off.

Hence this place would be pareto optimal wherein one is made better off without making anyone else worse off.