Lecture Notes 8

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

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Unformatted text preview: Pareto Optimality An economy is in a Par eto Optimal state if ther e is no way to make ever yone better off; i.e. if any move that makes some people better off hur ts 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 Production Possibility Frontier Slope of PPF = Marginal Rate of Transformation = 200/100 = 2 computers/car = Marginal cost of cars/Marginal cost of computers 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 Efficient Distribution Justin has MRS of 2 beers for a pizza...
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This note was uploaded on 04/07/2008 for the course ECO 100 taught by Professor R.willig during the Spring '08 term at Princeton.

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

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