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    Pareto Efficiency and Comparing Alternative Economic Systems

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    Describe what Pareto Efficiency is and why economists use this criterion for comparing alternative economic systems. Use a graphic display. Also looking for real life understanding of why economists use it for comparing alternative economic systems.

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    We say a system is Pareto efficient if there is no way to make one entity better off without making some other entity worse off. One simple way to understand it is to consider a pot with $1000. There are 4 people each of whom gets $250. There is no more money left in the pot. If we want to make any of them better off there is no way to do it other than taking the money from one and giving it to someone else. On the other hand if all 4 get $200 (for a total of $800) there is still $200 left in the pot. Thus, you can give $200 or a part thereof to one of the 4 people and make him or her better off without making anyone else worse off. The idea is that you are utilizing all available resources in the best possible way. We can do the same thing using a standard production possibilities frontier between two goods. Suppose you have 10 ...

    Solution Summary

    The solution discusses what is Pareto efficiency.