What are the alternatives to Pareto efficiency

Pareto optimum

1. Term: Social situation in which it is not possible to increase the welfare of one individual by reallocating resources without reducing that of another individual at the same time (point P in the diagram). In other words: A situation in which A can be better off and B does not have to be worse off at the same time (cf. figure “Pareto optimum”) shows that the system is not yet at its optimum.

The Pareto optimum represents the criterion for the welfare optimum within the framework of Paretian welfare economics. It is assumed that the individuals are independent of one another in their conceptions of utility (interdependencies in demand in the form of demonstrative consumption, follow-up effects, etc. are excluded) and the utility with increasing goods and services Factor set ownership increases.

2. Conditions for the existence of a Pareto optimum: a) Total conditions: The total conditions exclude that welfare can be increased by taking into account new products that are produced with superior technology by newly entering the market. Technical progress must have already taken place before the Pareto optimum is derived under total conditions.

b) Stability conditions: According to Hicks, stability conditions are the complete divisibility of the goods and factors used by all members of society, as well as indifference curves that are convex towards the origin and a concave transformation curve (income law). This eliminates the possibility of external effects in consumption and production.

c) Marginal conditions: Three marginal conditions must be met so that a Pareto optimum is obtained after a technically possible transformation of economic variables:
(1) The household equilibrium is fulfilled for all households according to the second Gossen law. The marginal rate of substitution between any two goods is identical for all households due to the same goods prices in the homogeneous markets (Household optimum). The marginal rate of substitution between two goods corresponds to the reciprocal of the corresponding marginal utility ratios.
(2) The production optimum is achieved by all companies, i.e. they produce according to the minimum cost combination. The marginal rate of (technical) substitution between two production factors is identical for all companies due to the fact that the factor prices are indistinguishable (Company optimum). The marginal rate of technical substitution is derived as the reciprocal of the respective marginal productivity ratios of these factors.
(3) The equivalent marginal rates of technical and indifferent substitution are the same.

A. social Pareto optimum is therefore present when consumption and production are at the optimum of static efficiency, i.e. the Scitovsky indifference curve affects the social transformation curve. Sufficient for an optimal allocation in the sense of the Pareto-Optimuma is e.g. the market form of perfect competition (main principles of welfare economics).

3. Evaluation: The Efficiency of the Pareto optimum consists in the fact that a problematic interpersonal comparison of benefits is dispensed with as well as the difficult establishment of a social welfare function. With the help of the ordinal preference function used, the utility measurement and utility aggregation problem of cardinal utility theory is circumvented.

The disadvantage The use of the Pareto optimum as a welfare criterion lies in the fact that a Pareto optimum cannot be compared without an additional welfare criterion, i.e. the optimum optimorum cannot be derived. On the contract curve as a (social) negotiation curve, all points each represent a Pareto optimum.

The use of the Pareto optimum as a comprehensive welfare criterion are also Limits set because it is derived on the basis of given income and wealth distributions. The solution of the allocation problem by the Pareto optimum thus leaves the distribution problem ultimately unsolved.