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If all bread and cloth were given to Ms. Smith, she would perceive let us say 700 units of utility. Mr. Novak would get nothing and his utility would be 0. If all the goods were given to Mr. Novak, he may perceive 500 units of utility and Ms. Smith would get 0. Pareto frontier is the black curve connecting these two points. It depicts the maximum possible welfare of this pair of people. |
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Any
point in an area between points A, B, and C represents Pareto
improvement over point A. |
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For example point A representing 200 units of
welfare for Mr. Novak and 300 units of welfare of Ms. Smith is
inefficient, because some changes in the allocation of resources,
technology and/or distribution of consumer goods can improve the
welfare of one or both of them.
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Point D, that is 500 units of utility for Mr.
Novak and 600 units for Ms. Smith is infeasible, it cannot be
achieved with existing resources and technology
All the points bellow
the Pareto frontier--in the interior of the brown area--are
inefficient. |
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Starting from the point A it would be possible to double the
welfare of Mr. Novak from 200 to 400 units without affecting the
welfare of Ms. Smith (point B) or similarly to increase the welfare
of Ms. Smith without affecting the welfare of Mr. Novak (point C). |
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Economic efficiency or Pareto Optimality does not
guarantee and neither does it exclude 'fairness' or 'social
justice'. These are concepts that go beyond the notion of
efficiency. They
are part of a special discipline
called 'Welfare economics' |
