Pareto Optimality Criterion (HINDI)
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- Опубліковано 5 жов 2024
- Pareto optimality for production is attained on the contract curve of the Edge worth Box diagram for production. ... In addition, the contract curve represents all tangency points of the two producers' isoquants and, thus, the two producers have the same MRTS at any point on the contract curve.Therefore, the Pareto optimality criterion can be stated in this way:
A situation in which it is impossible to make any one better off without making someone worse off, is said to be Pareto optimal or Pareto-efficient.
Obviously, the concept of Pareto optimality avoids interpersonal comparison of utility. Since most government policies involve changes in the economic state, which benefit some people and bring discomforts to others, it is obvious that the concept of Pareto optimality is of limited applicability in the real world situations.
For the attainment of Pareto-efficient situation in an economy, three marginal conditions must be satisfied.
These are:
(i) Marginal condition for efficiency in the allocation of factors among firms (efficiency in production);
(ii) Marginal condition for efficiency of distribution of commodities among consumers (efficiency in consumption); and
(iii) Marginal condition for efficiency in the allocation of factors among commodities (efficiency in product-mix or composition of output).
Pareto optimality, we shall assume, for the sake of simplicity, that there are only two consumers (I and II), two factors of production (X1 and X2). and two commodities (Q1 and Q2), i.e., our model here would be a 2 x 2 x 2 model.
Exchange efficiency
Exchange efficiency occurs when, for any given bundle of goods, it is not possible to redistribute them such that the utility (welfare) of one consumer is raised without reducing the utility (welfare) of another consumer.
A simple example of this is where there are two individuals, one with a loaf of bread, the other with a block of cheese. Both can be made better off by exchanging bread for cheese. An efficient exchange system will allow exchange of bread and cheese to take place until neither party can be made better off without one of them becoming worse off.
In a multi-product, multi-consumer economy, exchange is far more complex and involves the use of money to facilitate exchange. However, the principle is the same. So long as products can be reallocated to make one person better off without making another worse off, the economy is operating sub-optimally from the point of view of exchange efficiency. In a perfectly competitive market, exchange will occur until this criterion is met.
Production efficiency
Production efficiency occurs when the available factors of production are allocated between products in such a way that it is not possible to reallocate the production factors so as to raise the output of one product without reducing the output of another product.
This is analogous to technical or production efficiency at the level of the firm. What is being said here is that there are many situations in which it is possible to raise the total output in an economy by simply reallocating factors of production at no additional cost. This is because factors of production are more productive in some uses than they are in others. In a competitive economy, producers bid for factors of production until they are reallocated to their most productive use.
Output efficiency
Output efficiency occurs where the combination of products actually produced is such that there is no alternative combination of products that would raise the welfare of one consumer without reducing the welfare of another.
Both the exchange efficiency and the production efficiency criteria must hold in order for this criterion to be met. The combination of outputs produced according to this criterion is distributed between consumers according to the exchange efficiency criterion, and the economy is operating with production efficiency.
Pareto Optimality is the result of rational economic behaviour on the part of producers, consumers and owners of factors of production in a perfectly competitive economy. Although we don't have the scope to examine the underlying theory here it can be shown that Pareto Optimality will be achieved if all markets are perfectly competitive and in equilibrium.
It is important to realise that, whilst Pareto Optimality is the outcome in an economy that meets each of the three efficiency criteria listed earlier, this does not mean that there is only one 'optimal' allocation of resources.
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