glosser@ut-ngp.UUCP (glosser) (11/12/84)
Recently, there has been discussion on the network concerning public goods. Within this discussion a key buz-word brought up is the term Pareto-efficiency. The purpose of this article is to explain what Pareto-efficiency means, and (very briefly) its role in the history of economic thought. To begin, a good definition of what is meant by Pareto-optimality, Pareto-efficiency, Pareto-nonoptimality, Pareto-superior can be found in M I C R O E C O N O M I C T H E O R Y - A Mathematical Approach, by Henderson and Quant (1980 edition) page 286: "An allocation is Pareto-optimal or Pareto-efficient if production and distribution can not be reorganized to increase the utility of one or more individuals without decreasing the utility of others. Conversely, an allocation is Pareto-nonoptimal if someone's utility can be increased without harming anyone else. One allocation is said to be Pareto-superior to another if the utility of at least one individual is higher and the utility of none is lower, even though the allocation may not be Pareto-optimal. Analyses of Pareto optimality usually stops short of value judgements and interpersonal comparisons of utility levels. Consequently, changes which improve the positions of some individuals but cause deterioration in those of others cannot be evaluated in terms of efficiency; the net effects of the moves may or may not be beneficial." Further in the same paragraph: "......The abstraction from distributional considerations limits the number of questions that may be answered with the Pareto apparatus. For example, a society might have a Pareto-optimal allocation in which one consumer had 99 percent of all goods, but most people would not consider this to be a satisfactory allocation." Pareto-efficiency is a concept designed to evaluate different ways of allocating goods and services in an economy while at the same time avoiding the problem associated trying to make interpersonal comparisons of satisfaction. (If interpersonal comparisons of satisfaction were possible, then I could make the following statements: person A gets more satisfaction from eating a pound of steak than person B. Person C benefits more from fifty dollars than person D.). In other words, to make interpersonal comparisons of satisfaction assumes that it is possible to cardinally rank (assign a measurable magnitude to) satisfaction. However, economists can not make such interpersonal comparisons, nor, do I wager, can anybody else. It is at this point that the Paretian criterion comes into the picture. The Paretian criterion is as far as economists can go on welfare judgements without making interpersonal comparisons. All the Paretian criterion is concerned with is can somebody be made better off at nobody else's expense. This is what is meant by an efficient allocation of resources. As far as public policy goes, this criterion is very weak. It is very naive to assume that most policies concerning the allocation of goods and services do not make some better off and others worse off. When discussing alternative allocations of goods and services other criterion, besides efficiency, such as distributional justice, is needed. Hence to say that market system is a superior means of allocating resources simply and only because it is Pareto-efficient, or to say that government intervention is not bad mainly because the government can encourage Pareto-efficient allocation of resources is really not saying too much.
biep@klipper.UUCP (J. A. "Biep" Durieux) (11/13/84)
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The important thing with Pareto-optimality is this:
A Pareto-optimal solution may or may not be the best one, but
A NON-PARETO-OPTIMAL SOLUTION IS NEVER THE BEST ONE.
Additionally, a Pareto-superior solution is always better than
the other one, so Pareto-optimalisation is *always* a good thing,
even if it doesn't garantee (?sp) the best solution to be found.
If a "best" solution does exist, it is a Pareto-optimal one.
--
Biep.
{seismo|decvax|philabs}!mcvax!vu44!botter!klipper!biep
I utterly disagree with everything you are saying, but I am
prepared to fight myself to death for your right to say it.
--Voltaire