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Lecture Notes 8 - Pareto Optimality An economy is in a...

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Pareto Optimality An economy is in a Pareto Optimal state if there is no way to make everyone better off; i.e. if any move that makes some people better off hurts other people Utility of person 1 Utility of person 2 Utility Possibility Frontier Pareto Optimal (economically efficient) to be on it Equity is about where on it to be Equity – efficiency tradeoffs
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Production Possibility Frontier Slope of PPF = Marginal Rate of Transformation = 200/100 = 2 computers/car = Marginal cost of cars/Marginal cost of computers
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To Achieve Pareto Optimality, An economy must: Reach the Production Possibility Frontier Use best technology Minimize production costs At input prices that are the same for all enterprises so that MRTS equalized throughout Distribute production efficiently No waste “Consumer Sovereignty” by making shopping choices at non-discriminatory prices so that MRS equalized among all households
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Efficient Distribution Justin has MRS of 2 beers for a pizza
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