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Unformatted text preview: Efficiency and Markets Ariel Singerman October 5, 2010 What is efficiency? We examined different ways of deciding what is socially best For best we adopt the Pareto criterion For every allocation inside ABO It is possible to find a Pareto preferred allocation i.e.: for any interior allocation, any upper right allocation is a Pareto improvement. WHY? What allocation cannot be improved? All allocations on AB are as good as possible The Pareto frontier consists of all allocations for which The Pareto frontier consists of all allocations for which there are no allocations that are Pareto preferred there are no allocations that are Pareto preferred This is our notion of economic efficiency: An allocation is efficient, or Pareto optimal, if it lies on An allocation is efficient, or Pareto optimal, if it lies on the Pareto frontier; an allocation is inefficient if it is not on the Pareto frontier the Pareto frontier; an allocation is inefficient if it is not on the Pareto frontier Pareto optimality/efficiency implies: No resources are left unused No one can be made better off without making someone else worse off What is efficiency? The problem is that different allocation along the Pareto frontier cannot be compared in the sense that we cannot determine which one is more socially desirable Keep in mind: Efficiency might not be the only goal in dividing the social pie Efficiency and competitive markets Efficiency = Pareto optimality If economy on Pareto frontier efficient Inefficiencies in Exchange : resources could be distributed among individuals without...
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 Fall '08
 Farzin

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