Pareto Efficiency

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Pareto Efficiency

Post  KatieBradford on Sat May 30, 2009 6:40 pm

http://economics.about.com/od/productionpossibilities/a/pareto.htmPare

While studying the kidney exchange market model (or the house exchange market model) we dealt with the concept of "Pareto Efficiency". Essentially this was defined as no change will make one person better off without making someone worse off, or no change will make EVERYONE better off. While we argued this concept ensured even groups couldn't form coalitions to get better allocations, and I agree with it in this setting, there was something about the concept that still seemed off to me. Through a simple "about.com" (not a scholarly resource granted) article, I came across this explanation. This clearly deals with the differnece between pareto EFFICIENCY, and the concept of equality that is so prevalent in our culture is ignored in this concept. I thought this was an interesting distinction to make. While there may be nothing that makes everyone BETTER there may be something that makes everyone more EQUAL.

KatieBradford

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Join date : 2009-04-13

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Re: Pareto Efficiency

Post  Monil Gandhi on Sun May 31, 2009 10:55 pm

In terms of efficiency and equality, this relates to the "rich get richer" models we learned previously in class.

If the rich have more resources to invest and make efficient, they will get more money. Just like in pareto efficiency where the most efficient are generally not the the most equal, the rich have a better chance at being efficient with all their resources than a less fortunate person with less resources. This is clear from any of the power law graphs we looked at in class.

Not only that, but in many of the ideas we learned in class, efficiency means giving up equality and making some people jealous of others because they can be better of individually than they are currently. For example, in the selling/trading houses example with the green/red/blue/yellow people and houses, not everyone got their first choice house but some did. Also, not everyone would have allocate their preferences to one house over another in the same ratio. So, no matter how much one of the people in the graph likes their 1st choice house over their 2nd choice house, if the graph does not have a cycle there, no exchange will occur. This will leave this person much worse off than someone who say barely values their 1st choice over their 2nd choice but gets to trade anyways.

Monil Gandhi

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