Answer to Question #264828 in Microeconomics for manuze

Question

a.) Explain Pareto efficiency. [6 marks]

b.) Use appropriate illustrations, endowments and assumptions to show and explain that a competitive equilibrium achieves an efficient product mix.[8 marks]

c.) Using appropriate examples, explain the difference between efficiency and equity. [8 marks]

d) Use suitable or applicable examples with which goods are produced and distributed by individuals, society or government. [8 marks]

Answer 1

а) Pareto efficiency, also referred to as allocative efficiency, occurs when resources are so allocated that it is not possible to make anyone better off without making someone else worse off.

Pareto optimality is sometimes used interchangeably with Pareto efficiency. Arrow and Hahn (1971) and Lockwood (2008) argue that Pareto-optimality is a normative term, which belongs to welfare economics and imply social desirability; whereas Pareto-efficiency refers to a scientific result, without implying any ethical considerations

b) Competitive equilibrium is achieved when profit-maximizing producers and utility-maximizing consumers settle on a price that suits all parties. At this equilibrium price, the quantity supplied by producers is equal to the quantity demanded by consumers.

At the efficient level of output, it is impossible to produce greater consumer surplus without reducing producer surplus, and it is impossible to produce greater producer surplus without reducing consumer surplus.

c) An efficient market is one that optimizes the production and allocation of resources given existing factors of production. An equitable market means the distribution of goods and services throughout society and the profits received by firms are fair.

d) Our society, depending on locality, has provided such public goods and services as public education, sanitation, police services, fire protection, libraries, infrastructure maintenance (roads, bridges, communications networks, etc..)

Goods are produced and distributed by individuals. For example bread, fruits, milk, clothes etc.