Coursenotes_ECON301

Ppf only point b satisfies the overall efficiency

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Unformatted text preview: [2] one contract curve, [3] one utility possibility frontier (UPF). There will be at least one point on the contract curve at which the overall efficiency condition holds (MRS = MRT). Consequently, there will be at least one point on the UPF which will also be on the Grand UPF. Since there are infinitely many points on the PPF, there will be [1] infinitely many corresponding UPFs, [2] infinitely many points satisfying the overall efficiency condition, [3] infinitely many points on the Grand UPF (all of which are equally good). Thus, there are infinitely many solutions for the Pareto Optimal Production Economy. Furthermore, all of these solutions are Pareto Optimal. In other words, the solution to the Pareto Optimal Production Economy problem is indeterminate. 192 Since there are infinitely many solutions to this problem...which one should we choose? Since this model has infinitely many solutions, all of which are equally efficient, the selection of a specific solution will depend on other criteria, such as social values and judgments... How do economists formulate an analytical framework that includes social values and judgments? We use a conceptual framework that incorporates a social welfare function SWF = W(UA, UB) to summarize criteria such as social values and judgments. A social welfare function is thus a social choice on individual welfare (policy decision). This distinction differs somewhat from the concept of our usual utility function. The concept of a utility function defines individual choices over commodities UA = UA(XA, YA) UB = UB(XB, YB) while the concept of a social welfare function defines social choices over individual utility levels SWF = W(UA, UB) This is the idea that differentiates the desirability of utility distributions. For instance, one of the Pareto Optimal solutions to the problem may be that consumer A has almost everything in terms of utility while consumer B has next to nothing. This is a Pareto efficient solution that may not be socially desirable. A social welfare conto...
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