Economics
Social Efficiency
Social efficiency in economics refers to the optimal allocation of resources to maximize overall societal welfare. It occurs when the production and distribution of goods and services result in the greatest possible benefit for society as a whole. Achieving social efficiency involves minimizing waste and ensuring that resources are used in a way that generates the greatest possible value for society.
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10 Key excerpts on "Social Efficiency"
eBook - PDF- B Guy Peters, Jon Pierre, B Guy Peters, Jon Pierre(Authors)
- 2006(Publication Date)
- SAGE Publications Ltd(Publisher)
Of course, this need not be the case in practice. Further, the theoreti-cal reference of Pareto efficiency can itself be challenged in that it depends on the initial endowments of the members of society prior to the consideration of policies. Different initial endowments can result in different sets of Pareto efficient moves from the status quo. The dependence of Pareto efficiency on initial endowments has led some to reject it in favor of an interpretation of efficiency as max-imizing some social welfare function over the distribution of goods after the adoption of policies (Bergson, 1938). This approach, how-ever, places a political and conceptual burden on the analyst to choose a specific social wel-fare function that appropriately incorporates distributional values. From a practical per-spective, social welfare functions are often unworkable because they typically require extensive information, well beyond that pro-vided by markets that often provide the basis for applying potential Pareto efficiency. The guiding principle for measuring net benefits within the framework of potential Pareto efficiency is willingness to pay: how much money would someone be willing to pay to obtain the impacts of a policy? The resources required to implement a policy are valued in terms of their opportunity costs, the willingness to pay for what the resources would have produced in their next best uses. Willingness to pay is a “money metric” for persons’ utility changes from policies that can be aggregated across persons to obtain the overall net benefits of a policy. If the net bene-fits are positive, then the policy offers a poten-tial Pareto improvement. Efficiency calls for choosing the set of feasible policies offering the largest net benefits. HANDBOOK OF PUBLIC POLICY 420 The actual measurement of willingness to pay can be based either on compensating or equivalent variation.
eBook - PDF- Tomas Dominguez Benavides, Juan Manuel Delgado Sanchez(Authors)
- 2008(Publication Date)
- World Scientific(Publisher)
That is why the analysis of the social desirability of equilibrium outcomes comes next in the agenda. Suppose that the economy is arranged in such a way that all agents are Mathematics and markets: Existence and efficiency of competitive equilibrium 171 simultaneously realizing their plans. Can the economy do better? If this were the case, there would be scope for the intervention of some authority (the Government, say), because changing the spontaneous allocation of re-sources would result in a better state. The key questions are, of course, what “better” means, and whether such an authority will be able to improve the social situation. There are many ways of ranking the outcomes of an economy, but there is a simple principle which seems difficult to object: no resource allocation can be considered satisfactory if it were possible to improve the situation of all the members of the society with the available resources. This is the Pareto principle, which is to be understood as a minimal test of economic efficiency . Note that there may well be allocations passing this test which still can be deemed socially undesirable. To be clear: we are not saying that the Pareto principle ensures good outcomes; what we are saying is that one should be worried about those outcomes which do not pass such a simple test. We present here a simplified general equilibrium model of a (pure ex-change) competitive economy. A competitive economy is one in which in-dividual agents have no market power. In particular, each individual agent takes market prices as external parameters over which she has no influ-ence (price–taking behaviour). This setting describes a world made of many agents each of which is very small with respect to the global market. We shall concentrate here on the case of “pure exchange economies” to make things simpler (even though the argument extends immediately to the case of production economies).
eBook - PDFGeneral Equilibrium Theory
An Introduction
- Ross M. Starr(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
– G. Debreu (1986) 19 Pareto efficiency and competitive equilibrium 19.1 Pareto efficiency The purpose of economic activity is to allocate scarce resources to promote the welfare of households in their consumption of goods and services. There is a very large number of possible allocations of resources (typically, an uncountable infin-ity), but most of them are wasteful – we can do better. Some wasteful allocations are those that do not make effective use of productive resources (corresponding to points inside the production frontier in the Robinson Crusoe economy). An alternative form of inefficiency occurs in allocations that allocate the mix of out-puts among consumers without equating marginal rates of substitution (subject to boundary conditions), leaving room for improvement in the mix of consump-tion across households (wasteful points corresponding to those off the locus of tangencies in the Edgeworth box). Economic theory does not give us precise guidance as to the desirable distri-bution of income and wealth across households. The theory is agnostic on the distribution of income between Smith and Jones and between Rockefeller and Micawber. We are led then to posit a criterion of nonwastefulness as a standard for the effective utilization of scarce resources, while avoiding the moral question of the desirable distribution of income. The nonwastefulness criterion is Pareto efficiency , and it is fundamentally a simple idea. A (Pareto) improvement in allo-cation is a reallocation that increases some household’s utility (moves higher in the preference quasi-ordering) while reducing no household’s utility. An allocation is Pareto efficient if there is no further room among attainable allocations for (Pareto) improvement. To analyze this concept more fully we start with the definitions needed to formalize these concepts. 205
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
This sufficient condition is provided by a social welfare function, a concept largely attributed to economist Abram Bergson (1938) which was further popularized by economist Paul Samuelson (1947, 1983). It is sometimes referred to as the Bergson–Samuelson social welfare function. 15.6.1 From general equilibrium to welfare For a general equilibrium, the principal concern is with optimal resource use. Pareto efficiency or optimality is concerned only with delivering the most from given resources but has no concern with how the product is distributed. This is why it is said to provide only the necessary conditions for a welfare maximum. Using the two-commodity, two-consumer, two-input case, the aim of welfare economics is to determine the ‘best’ distribution of income given that full economic efficiency (Pareto optimality) has been achieved. There is, however, no scientifically meaningful way to compare the utility levels of various individuals. It cannot be determined scientifically how much more or less satisfaction a piece of cheese cake will bring to one person than it will bring to another. There is no scale on which pleasure or pain can be measured so that interpersonal comparisons can validly be made. This makes it difficult to determine whether one distribution of income is better than another. Consequently, economists typically tend to view income distributions that are less unequal as the more desirable. While the three marginal conditions for a general equilibrium provide the necessary conditions for a welfare maximum in a society, the social welfare function provides the sufficient condition. The necessary conditions Recapping, the three marginal conditions for optimal resource allocation derived under general equilibrium analysis and which provide the three necessary conditions for a welfare maximum, may be summarized as follows: 1 Optimal allocation of commodities among consumers.
eBook - PDF- Sidney Weintraub(Author)
- 2016(Publication Date)
Pareto optimality is defined as a state of an economy in which no individual can be made better off (by some possible reallocation of resources or final goods) without making someone else worse off. 2 Once an econ-omy has achieved a Pareto-optimal state, further reallocation must harm at least one other person. An economy not at a Pareto optimum is •Paul A. Samuelson, The Foundations of Economic Analysis Cambridge: Harvard University Press, 1955, p. 223. After Vilfredo Pareto, who was well aware that individual utilities were incapable of comparison but nevertheless conceived of a definition of collective utility. See V. Pareto, Manual of Political Economy, 1906. trans. Ann S. Schwier and Alfred Page (New York: Augustus M. Kelley, 1971). Welfare Economics 449 also termed inefficient. The difference between efficient and in-efficient points can be illustrated for a very simple exchange economy by means of the Edgeworth-Bowley box diagram. 3 Consider two individuals, A and B, and a fixed social endowment of two consumption goods, X and Y. Each indifference curve for A shows the combinations ofX and Y which yield the same level of satisfaction for A; these originate at O a in the southwest corner and are ranked in ordinary fashion, with II A preferred to I A and so on. B'S origin is in the northeast corner and his indifference curves are upside down, with preferred combinations of X and Y further toward the A origin. Consider an arbitrary initial distribution of the goods such as point D, in which A has Ο λ Χ Λ units of X and 0 A y A units of Υ. Β has the remaining amounts of X and Y, namely O b X B and 0 B y B . The initial endowment puts A on II Λ and Β on I B . At point D, A'S marginal rate of substitution o f X and Y (the slope of TT'), is relatively high: A would be willing to sacrifice a great deal o f Y to obtain another unit ofX.
eBook - PDF- John Gowdy(Author)
- 2020(Publication Date)
- CRC Press(Publisher)
For example, by moving from point 2 to point 1, in Figure 4.4, consumer A (Alex) is made better off. But to achieve that higher utility for Alex, Bertha (consumer B) must give up utility and be made worse off. Such a move would not be allowed according to the Pareto criterion. A situation that reduces the utility of one of the consumers in ex-change for another’s utility increase requires a value judgement about the absolute levels of utility of these consumers that goes beyond the relative utility framework of Pareto optimality. There is nothing within the basic neoclassical model of pro-ducer and consumer behavior that allows us to construct a social welfare function. The neoclassical concept of efficiency can only take us to the production possibilities frontier, or to the grand utility possibilities frontier. To pick out a single point on that frontier from among the infinite possibilities, we must leave the neoclassical framework and include additional considerations about the social desirability of the various possible utility combinations between members of society. The fact that a social welfare function has to be constructed based on an external set of rules, so that a socially optimal allocation of goods and inputs can be determined, is the Achilles heel of neoclassical theory. Once we are forced to come up with rules of choice to pick a particular Pareto optimal combination of goods and a particular distribution of these goods, we can no longer avoid addressing the ethical questions we have dodged so far. The necessity of a social welfare function was first discussed by the economist Abram Bergson in 1938. Since then a number of economists and social philosophers have suggested rules to con-struct such a function. Nicholas Kaldor suggested the simple rule that a move from one point to another on the utility possibilities frontier is justified if the person gaining from the move values her gains more than the person who loses values his loss.
eBook - PDFThe Moral Dimensions of Public Policy Choice
Beyond the Market Paradigm
- John Martin Gillroy, Maurice Wade, John Martin Gillroy, Maurice Wade(Authors)
- 1992(Publication Date)
- University of Pittsburgh Press(Publisher)
15. There is a plethora of literature on the distinction between personal (self- regarding) preferences and public (group-regarding) values. See, e.g., Maass, "Benefit-Cost Analysis: Its Relevance to Public Investment Decisions," 80 Q. J. Econ. 208, 216-17 (1966); Marglin, "The Social Rate of Discount and the Opti- mal Rate of Investment," 77 Q. J. Econ. 95, 98 (1963). 16. See S. Kelman, What Price Incentives? Economists and the Environment ch. 3 (1981). 17. Kneese & Bower, note 9 above, at 4. 18. The underlying Paretian standard holds that a move from state A to state B increases social welfare or utility if at least one person prefers B to A and no one prefers A to B. This standard is generalized to more complex cases by the Kaldor- Hicks principle which holds that A's social welfare is increased if those who prefer B can compensate those who want A and still maintain their preference. Thus the notion of social welfare or overall utility is defined strictly in terms of satisfaction of preferences insofar as these preferences are measured in terms of willingness to pay. It has no independent, normative significance. For a clear discussion of these con- cepts in relation to current regulatory concerns, see Coleman, note 1 above, at 649. 19. Baxter, note 4 above, at 19. 20. Contemporary economic theory assumes that if a preference of any individ- ual is satisfied, that individual and society as a whole is "better off" as a result. This, indeed, is the basis of the concept of a Pareto improvement-a change in social state that at least one person prefers and no one opposes. This is not an improvement in any normative sense. It is an improvement, if at all, from that individual's point of view. There is no "point of view of society as a whole" from which it can be viewed as a social improvement.
eBook - PDF- Luther Tweeten(Author)
- 2019(Publication Date)
- CRC Press(Publisher)
CHAPTER TWO Public Welfare and Economic Science Economics can be defined as the science of allocating scarce rcsources among competing ends to satisfy these ends as fully as possible. The definition raises several issues. The term science implies not only a meaningful classification of facts and a systematic body of knowledge but also a logical structure and ability to predict Whether economics can meet these requirements for a science is conjectural. Of great interest is the term ends in the definition. What ends or goals are to be achieved, and for whom? In farm management economics, the dilemma of alternative goals poses no serious philosophic problems. The economist can hold out a profit-maximizing allocation of resources computed by linear programming, and the farm manager can take or leave it depending on his personal goals and financial circumstances. An economist employed by a farm organization with well-defined goals also has no confusion over how and whom to serve. The task is not easy for the policy economist whose salary is paid by taxpayers. Farm policies have a far-reaching impact not only on U.S. farmers and consumers but sometimes on the world. The individual farmer often must accept the policy that the majority of farmers or members of society voted to accept. The goal in broad terms may be defined as well-being, satisfaction, welfare, or utility in society. But there are problems in trying to maximize something as elusive as utility by a policy that affects many individuals, each with unique objectives in life. Welfare economics deals with such issues. It is a part of general economic theory that attempts to answer the question what can the economist in his professional role of a scientist say about public policy? This chapter outlines the origins of welfare economics and criteria for making economic prescriptions. The chapter deals with economic equity and economic efficiency and with factors that interfere with economic efficiency in society.
eBook - ePub- Renato Cirillo(Author)
- 2012(Publication Date)
- Routledge(Publisher)
4There are still various interpretations of Pareto’s thought on this matter, but there is quite a universal consensus as to what constitutes a Pareto optimum: it indicates a position (organization or point) such that any change which makes some people better off results in making others worse off. In other words, if such a state is reached it is not possible to increase the utility of some consumers without diminishing that of others.So Pareto’s criterion leads to an ideal optimum, provided the income distribution is also ideal. If not, then it only helps us to understand how individuals can attain maximum welfare within the limits of their respective incomes.This could be demonstrated with the use of the familiar Edgeworth Box Diagram5 reproduced on p. 44.In this diagram A and B could be initially at any point C where two of their indifference curves intersect. They could always improve their position if they move and reach a point of tangency (D or E) between any two of their indifference curves. At that point their marginal rates of substitution are equal. By finding similar points within the diagram and joining them we get what is termed the contract curve. Any point on the contract curve is a Pareto optimum and evidently any situation outside is inferior. But we cannot say more than that. By reaching an optimum position A and B would maximize their welfare but they would still remain a pauper and a millionaire if they happened to be so in the first instance. It is evident then, that in a society where strong income disparities prevail, ‘maximization’ of welfare would be of limited value as far as the welfare of society is concerned. Incidentally one should observe that although Pareto assumed income distribution as given because he refused to make judgments, the acceptance of the contract curve as representing welfare optima is already a welfare judgment!
eBook - PDFTruth or Economics
On the Definition, Prediction, and Relevance of Economic Efficiency
- Richard S. Markovits(Author)
- 2008(Publication Date)
- Yale University Press(Publisher)
Second, in practice, when actually analyzing the allocative efficiency of par-ticular government policies, no economist ever uses ‘‘economic efficiency’’ in this Pareto-superior/Pareto-inferior sense. In my experience, all articles that begin by defining economic efficiency in the Pareto-superior/Pareto-inferior sense end up implicitly defining the concept in the correct monetized sense Chapter 1 delineated. Third, the Pareto-superior/Pareto-inferior definition of economic efficiency is disfavored not only by its inconsistency with popular and professional understanding and usage but also by the fact that the concept it creates would be completely or virtually useless. Since in our actual, highly-Pareto-imperfect world virtually all private choices and (I would submit) all public policies benefit some and harm others, the economic efficiency of all or virtually all choices whose economic efficiency economists investigate would be indeter-minate if the concept were defined in the Pareto-superior/Pareto-inferior sense. Such a definition would therefore prevent the concept from making the contribution Part III will argue it can make if defined in the monetized sense Chapter 1 articulates to the utilitarian evaluation of choices and policies. Fourth, for two reasons, the Pareto-superior/Pareto-inferior definition of the impact of a choice on economic efficiency will not enable economists to achieve the goal that led them to propose it—namely, to increase their social contribution by increasing the moral significance of the economic-efficiency conclusions their expertise enables them to generate. I have already explained the first reason, which is empirically more important: on this definition, the economic efficiency of all or virtually all choices will be indeterminate. The sec-ond reason (which is admittedly less empirically important) may be somewhat A Critique of Definitions for Economic Efficiency 49
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