Pareto Optimality
If you have limited resources, you are bound to make decision. This is to assure
that your choices are the best possible options. Perhaps, you are thinking what are
the possible gadgets, clothes, shoes, or cosmetics you should buy? Or maybe you
are thinking on saving your money, or sending foods to your close friends?
Anything under the sun is a possible option but should be within the budget and
fits your preferences.
Such concept is true in the modern welfare economic analysis. A consumer must
make choices given with limited income at his/her disposal. But one thing is for
sure, he/she cannot pay for unlimited quantities of all goods and services he finds
desirable. You might say that this concept familiar, yes? This is because this is the
very concept presented in your microeconomics, particularly the consumer choice
and theory of production. Both are quite similar to some aspects in terms of
decision making.
Similarly, societies must make decisions about how to employ their limited labor,
capital, natural resources, and other resources. The total number of resources
available at any given time can be considered fixed, suggesting that we must make
trade-offs. When we ask for more of one thing, we are frequently asking for less of
another, and that is trade-off. Furthermore, in any such changes of the societies’
decision-making may affect millions of households. Hence, it is safe to anticipate
that there will be winners and losers from such changes. This triggers the question
of whether a change is desirable in the numerous circumstances where there is no
consensus among the societies.
The concept of winners and losers in the change of allocation of resources in the
society is directed to the concept called Pareto optimality.
According to Vilfredo Pareto, a PARETO OPTIMALITY or PARETO
EFFICIENCY. “An economy is in a Pareto Optimal state when no further changes
in the economy can make one person better off without at the same time making
another worse off”. Pareto Optimality is quite a challenge to illustrate but let us
recall first the microeconomic concepts particularly the production possibilities
frontier to fully grasp the idea.
On a more specific note, Pareto optimality represents a situation in which
resources in the economy are fully employed and therefore increasing production
of one good requires sacrificing the production of another. There is a trade-off in
terms of the allocation of the resources. However, Pareto optimality does not
factor in the fairness or equality.
