Answer to Question #211291 in Microeconomics for hawalul

Question

(i) With your own practical example describe the relationship between the following terms as used in resource allocation-Pareto efficiency, Pareto inefficiency, Pareto improvement

Answer 1

Pareto efficiency refers to an economy's ability to make the greatest use of its limited resources by using all of its resources to produce products and services at the lowest possible cost.

A Pareto improvement to a system occurs when a change in the distribution of commodities benefits at least one person while harming no one. If there is an alternative allocation in which one person is better off and no one is worse off, the resource allocation is Pareto improved.

The economic condition described by an inefficient allocation of commodities and services in the free market is known as Pareto inefficiency. Individual incentives for rational behavior do not lead to rational group results in Pareto inefficiency.

For example; If a football stadium is filled, with no empty seats, its utilization is Pareto efficient or optimum. In this situation, the only method for another spectator to see the match (or game) is to remove one existing viewer and assign their seat to the new spectator, this is referred to as Pareto improvement. When there are still empty seats, though, the stadium is inefficiently utilized hence in this case we say the stadium's utilization is Pareto inefficient.