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1. (i) Define Pareto criterion and Pareto optimality. (ii) The latest figure on Bill Gates¶ net
worth in 2010 is $54 billion. If the US Government levies a tax of $1 billion on Bill Gates
and gives it to the poor, would this tax result in a Pareto-preferred state? Briefly explain
why and why not.
(i) 4 marks and (ii) 8 marks
(i) Pareto criterion ± in comparing two social states or allocations (E or F) such that E is Pareto
preferred to F if no one is worse off in E than in F, and if at least one person is better off in E
than in F.
Pareto optimality ± a social state is Pareto optimal if no other attainable social state is
Pareto-preferred to it.
(ii) Assume social state F is where Bill Gates has a net worth of $54 billion and without the $1
billion tax. The tax of $1 billion on his wealth and then the US Government transfers the
tax money to the poor results in social state E. Social state E could be a Pareto-preferred
state compared to social state F if Bill Gates is not being made worse off from paying the
$1 billion tax and at least one recipient of the transfer is made better off according to Pareto
If Bill Gates feels being made worse off by the tax, then social state E is not Pareto-
preferred to social state F even millions of poor are made better off.
However, if Bill Gates feels good when he uses his money to help the poor and the more
poor people he helps, the happier he gets. If he believes the US Government can do a
better job in helping the poor than him such that more poor people can benefit when his
money is given out through the US Government than his own charity, then it would be a
win-win situation WKHPRUHSRRUSHRSOHFDQEHQHILWIURP%LOO*DWHV¶PRQH\DQGWKHPRUH
happier Bill Gates gets) and social state E is definitely Pareto-preferred to social state F.