Pareto efficiency: Difference between revisions

Revision as of 22:48, 14 June 2005

Revision as of 00:22, 15 June 2005

Line 5:

If an economic system is not Pareto efficient, then it is the case that some individual can be made better off without anyone being made worse off. It is commonly accepted that such inefficient outcomes are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating [[economic system]]s and political policies.

In particular, it can be shown that, under certain idealised conditions, a system of [[free market]]s will lead to a Pareto efficient outcome. This was first demonstrated mathematically by economists [[Kenneth Arrow]] and [[Gerard Debreu]], although the result may not necessarily reflect the workings of real economies because of the restrictive assumptions necessary for the proof mean(markets thatexist thefor resultall maypossible notgoods, necessarilymarkets reflectare theperfectly workingscompetive, ofand realtransaction economiescosts are negligible). This is called the [[first welfare theorem]].

Not every Pareto efficient outcome will be regarded as desirable. For example, consider a [[dictatorship]] run solely for the benefit of one person. This will, in general, be Pareto optimal because it will be impossible to raise the well-being of anyone (excluding the dictator) without reducing the well-being of the dictator, and vice versa. Nevertheless, most people (except by definition the dictator) would not see this as a desirable economic system.