Pareto Optimality Criterion
The Pareto optimality criterion was put forwarded by the Italian economist Vilfredo Pareto.
The Pareto optimality criterion states that any policy change or reallocation of resources that
makes at least one individual better off without making anyone worse off bring about an
improvement in social welfare. On the opposite, if a policy change makes at least one
individual worse off and no one else better off, will shows a decrease in social welfare.
According to Pareto optimality criterion social welfare reaches maximum when it is
impossible to increase the welfare of one individual without making a reduction in the
welfare of some other individuals. The Pareto optimality criterion is based on the following
assumptions.
Assumptions
1. The model consists of two commodities X and Y.
2. The model consists of two consumers A and B.
3. The model consists of two factors K and L and two firms F1 and F2.
4. Consumers maximise their utility function which are independent of each other.
5. Factors K and L are homogeneous and perfectly divisible.
6. Production functions of both goods are given.
7. There are perfect competition in both product and factor markets.
The Pareto welfare criterion can be explained with the help of the following diagram
Y
U G
D
F
B’ s Utility
E
C
H
O
A s Utility U1 X
The Pareto optimality criterion was put forwarded by the Italian economist Vilfredo Pareto.
The Pareto optimality criterion states that any policy change or reallocation of resources that
makes at least one individual better off without making anyone worse off bring about an
improvement in social welfare. On the opposite, if a policy change makes at least one
individual worse off and no one else better off, will shows a decrease in social welfare.
According to Pareto optimality criterion social welfare reaches maximum when it is
impossible to increase the welfare of one individual without making a reduction in the
welfare of some other individuals. The Pareto optimality criterion is based on the following
assumptions.
Assumptions
1. The model consists of two commodities X and Y.
2. The model consists of two consumers A and B.
3. The model consists of two factors K and L and two firms F1 and F2.
4. Consumers maximise their utility function which are independent of each other.
5. Factors K and L are homogeneous and perfectly divisible.
6. Production functions of both goods are given.
7. There are perfect competition in both product and factor markets.
The Pareto welfare criterion can be explained with the help of the following diagram
Y
U G
D
F
B’ s Utility
E
C
H
O
A s Utility U1 X
