ECON361 Chapter Notes - Chapter 2: Social Welfare Function, Pareto Efficiency, Pareto Principle
9 Aug 2016
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Purpose: introduction to pareto efficiency (primary definition of allocative efficiency). Cba is a framework for measuring allocative efficiency. Allocative efficiency: resources are deployed in their highest valued use in terms of the goods and services they create. Pareto efficiency: an allocation of goods is pareto efficient if no alternative allocation can make at least one person better off without making anyone else worse off. Cba can be used to provide information about the relative efficiency of alternative policies. The link between net benefits and pareto efficiency is straightforward: if net benefits are positive, then it is possible to find a set of transfers that makes at least one person better off without making anyone else worse off. Willingness to pay (wtp) is the payment that one would have to make or receive under the policy so one would be indifferent between the status quo and the policy with the payments.
