Pure exchange economy We can now pose the following question Is it possible to reallocate apples and figs between Adam and Eve to make Adam better off while Eve is made no worse off? Allocation h in Figure 3. 3 is one possibility. We are"moving along Eve's indifference curve, so her utility remains unchanged. Adam's utility clearly increases Clearly, other allocations achieve this same goal, such as allocation p Once we reach allocation p, we cannot raise Adam's utility any more, while keeping Eve's utility unchanged
11 Pure exchange economy • We can now pose the following question: Is it possible to reallocate apples and figs between Adam and Eve to make Adam better off, while Eve is made no worse off? • Allocation h in Figure 3.3 is one possibility. We are “moving along” Eve’s indifference curve, so her utility remains unchanged. Adam’s utility clearly increases. • Clearly, other allocations achieve this same goal, such as allocation p. • Once we reach allocation p, we cannot raise Adam’s utility any more, while keeping Eve’s utility unchanged
Pure exchange economy An allocation is Pareto efficient if the only way to make one person better off is to make another person worse off Often used as the standard for evaluating desirability of an allocation of resources Pareto inefficient allocations are wasteful A Pareto improvement is a reallocation of resources that makes one person better off without making anyone else worse off 12
12 Pure exchange economy • An allocation is Pareto efficient if the only way to make one person better off is to make another person worse off. – Often used as the standard for evaluating desirability of an allocation of resources. – Pareto inefficient allocations are wasteful. • A Pareto improvement is a reallocation of resources that makes one person better off without making anyone else worse off