Talk:Pareto efficiency

Pareto Efficiency

Confused about definition:

"Pareto efficiency or Pareto optimality is a state of allocation of resources from which it is impossible to *reallocate* so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off"

Define reallocate. What does it mean? Move *one* resource from one to another, or a completely new allocation? Has a big impact on the meaning. — Preceding unsigned comment added by 136.186.248.1 (talk) 03:36, 8 March 2017 (UTC)

'Corollary'

I removed the text:

A corollary of a Pareto efficient economy that is desirable is that all workers make the same wage and all firms operate with the same profit margins.

I tend to think that this is value judgement. If the writer meant this in general, then they are saying that a coal miner (a dangerous, dirty job) should recieve the same wage as a librarian in a small town. Since the jobs are different, having the same wage would be unfair. Even Twin Oaks provides slightly different benefits to workers who do different jobs. Profit margins in industries are also likely to be different for reasons such as different risk and different capital startup costs. I have no objection to the idea in general that equality is good, but I would hesitate to call it a corollary, and inso much as it is mentioned in an article on Pareto efficientcy, it should probably be mentioned that it is trying for a different idea. Jrincayc 16:13, 3 Jan 2005 (UTC)

Reply by 69.107.96.61 5 Jan 2005. Hi Mr. Jrincayc. I am not a professional economist (like you?) but I believe that the corollary is not a value judgement but in fact a consequence of a pareto efficient economy (one that is at the boundary of the production possibility curve). This I recall from memory, years ago, from my Econ 101 class. I could be mistaken, but I think that once you reach the boundary, by definition all wage differentials, at the margin, will equal zero. That is, suppose that a wage differential exists for rocket scientists. A bunch of people will 'retool' and become rocket scientists, which will drive down the wage differential to zero. (In fact, in the aerospace industry, that's exactly what happened! Too many smart people in aeronautics, that's why I switched majors and became a lawyer). So, in a 'steady-state', long-term, quisscent 'Pareto optimal' economy, everybody makes the same amount of money (kinda like Communism and Sweden, but different). Anyhoo, I could be mistaken so I will let your revision stand. PS--I see we share some similar interests: IP and programming. Try C#.NET for a cool, easy to learn OOP language.--Cheers, User:69.107.96.61

Well, assuming that everyone was alike, there would still be differences in the amount that different jobs payed since the jobs themselves are different. A dangerous, dirty job that required lots of education would pay better than an safe easy job that required no education because if the jobs payed the same, then a person in the hard job would switch to the easy job. What would happen if everyone was the same is that the wages would hit a point so that people would be indifferent between the jobs, because the wage difference would exactly compensate for the differences in danger, effort and education... So the benefit of each job would be the same, but the monetary wage would be different. Since people are different, not even this happens completely, but there are effects to even out the overall benefits of different jobs. Jrincayc 13:58, 6 Jan 2005 (UTC)

Not to beat a dead horse, but I think confusion is with transient versus steady-state effects. "You" are thinking more transient, while "I" am thinking equilibrium (end-point) steady state. At the "steady state" time is infinity, so while people are different, and some jobs take more time to learn, and are more dangerous than others, and should and do initially yield more than safe, easy to learn jobs, at the limit (t = infinity) the wage differential goes to zero regardless of the job (so crab fisherman in Alaska, the world's most dangerous job next to conflict diamond mining in Angola, make the same as a desk receptionist in Peoria). Of course in the 'real world' this would never happen, but keep in mind Pareto optimal is a mathematical construct, not necessarily a real-world event (kinda like Adam Smith's 'perfect competition' where nobody has market power). Another corollary of Pareto optimal efficiency, as I recall, was that all investments and all corporations returned and earned an equal amount of money. The same principle applied: risky investment prices were 'bid up' by eager investors, until the return was the same as what the bank gives you. In fact, in a book called "Triumph of the Optimists: 101 Years of Global Investment Returns" by Elroy Dimson, Paul Marsh, Mike Staunton (good book if you can find a copy), it has been shown, on rather sketchy data, that in fact over the last 100 years, world wide, risky investments yielded about the same as riskless investments (I can relate to that--since the mid 90s my investments are running at about 3% a year compounded! Dang dot-com crash!). But let's agree to disagree on this one. For one thing, I support Wikipedia (have given money to them) but I think long-term it is best to keep the explanation of topics simple, for high-school kids and for quick rough outlines of topics rather than get into grad level discourse, which tends to confuse in an abbreviated format such as here. Cheers, 69.107.96.61 6 Jan 2005

I think that we may be in violent agreement. Let me try and define what I am talking about for the wages. First of all for a given job you have benefits you recieve such as money, health care, retirement and so forth. For a given job you also have costs such as your time, risk of death and dismemberment, physical effort, mental effort and so forth. You also have effort to get the job which includes things such as education, security clearences, licences and so forth. Lets call these benefit, cost, and obtain respectively. First, assuming that obtain is the same for two jobs, I would expect that under the long run people are the same assumetions (LRPS) for any two jobs a and b with the same obtain, benfit_a - cost_a = benfit_b - cost_b. I am pretty sure that this is the invariant, since if say benefit_a - cost_a > benefit_b - cost_b, then more people would want to work at job a than at job b. Since there are extra people trying for job a, and too few people trying for job b, supply and demand would tend to raise the benefits for job b and lower the benefits for job a. So, in the long run, I expect that benefit_a - cost_a = benefit_b - cost_b for all jobs a and b where obtain is the same. Note that this says that benefit_a = benefit_b only if cost_a = cost_b, and I am pretty sure that cost_a and cost_b will be different for many jobs (risk of death, physical effort and so forth vary for jobs). Now, how to deal with obtain. I hope we can agree that being a grocery clerk and being a professor of physics have different obtaining costs. One requires around a month or so of training, and the other requires around a 6-10 years of training (beyond high school). So, there is a different obtaining cost for each. Now, in the LRPS equilibrium, you will only choose a job with a higher obtain if you get greater net benefits later on. So, I think the equilibrium equation is: lifetime(benefits_a - costs_a) - obtain_a = lifetime(benefits_b - costs_b) - obtain_b. Lifetime is a rather complicated intergral that incorperates things like discounting and so forth (that I lack the interest to really calculate), but taking it as the sum of yearly benifits - cost for every working year is a reasonable aproximation. Now, if this is higher for job a than job b, then again, you would expect that there would be supply and demand mismatch issues, so benefits would be raised and lowered to fix that problem. So, as long as the obtain cost and the regular cost are different for different jobs, the benefits of each job will be different in the long run people same assumptions. However, each person will be indifferent to which job that they get (I think this is what you are remembering from your economics class).

As for businesses, I agree that in the long run, each business sector should be earning the same economics profits (but very different accounting profits). I hope this makes sense. If it doesn't tell me where so I can try and figure out if I made a mistake or I am being unclear. Jrincayc 16:20, 7 Jan 2005 (UTC)

GRAPH IS WRONG

Something's wrong with this graph, right? Only ONE point on the frontier is Pareto efficient. E.g.: Suppose your production is totally focused on the production of A and you produce 0 B. Yet all your citizens prefer B to A. Obviously moving production toward B is a PE move. — Preceding unsigned comment added by 141.161.133.5 (talk) 20:21, 18 July 2017 (UTC)

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There is something wrong with the plot, but I don't think it's what the user stated above. There can be infinitely many points on the Pareto front, so long as each point is not dominated by another, i.e. you cannot improve all the objective simultaneously. The user's point about population preferences speaks to weighting the objectives and is one method to select the preferred solution from among the set of Pareto optimal solutions. There is however a problem with the plot. As shown, State N is Pareto optimal. It dominates states A-D in terms of Item 1, and dominates states E-H in terms of Item 2. State N is therefore a non-dominated (or non-inferior) solution and is part of the Pareto front.

Gcranston (talk) 19:36, 5 September 2017 (UTC)

There is nothing wrong with the plot. I thought so too, but if you read the caption, it describes the image as "a Pareto-efficient frontier, where the frontier and the area left and below it is a continuous room of choices." So, the points in the image are not the only possible points, but rather examples of points in the space. N is not optimal, because there is a point on the line between D and E that has more of item 1 and of item 2. The image is fine, and should not be changed Mattster3517 (talk) 18:44, 1 January 2018 (UTC)

4.16.194.230 (talk) 22:49, 19 December 2018 (UTC) If is N not on the frontier, but then in the other plot the points immediately left of A and right of B are on the the frontier, what's going on? Doesn't seem that both plots can be right. My $0.02 is that point N in the first plot is not dominated by neighboring points and should be on the frontier.

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The graph is wrong. It is true that N & K are not PE. But A-H are only POSSIBLY PE. This depends on the MRSs of consumers. As the first person, above, said: If consumers have no taste at all for good 2, then obviously point A is not PE. — Preceding unsigned comment added by 73.163.185.230 (talk) 17:49, 21 April 2018 (UTC)

If is N not on the frontier, but then in the other plot the points immediately left of A and right of B are on the the frontier, what's going on? Doesn't seem that both plots can be right. My $0.02 is that point N in the first plot is not dominated by neighboring points and should be on the frontier. 4.16.194.230 (talk) 22:49, 19 December 2018 (UTC)

Please note: comments generally should be added at the bottom of a discussion. And should be signed by adding the "four tildes" ("~~~~") at the end of your comment. Also: discussions of what is "right" (or wrong) generally require reference(s) to a source. ♦ J. Johnson (JJ) (talk) 00:20, 20 December 2018 (UTC)

• The graph in question is the production possibilities frontier, and hence is not about preferences but rather is about possible combinations of products produced. I’ve moved the graph to a more appropriate section to avoid confusion. Loraof (talk) 18:31, 4 January 2019 (UTC)

Quotes and wordsaswords

I won't edit, since not my area, but I would suggest changing the use of double quotes to italics in the cases where terminology is being introduced and discussed. Please see MOS:WORDSASWORDS. "Use italics when writing about words as words, or letters as letters (to indicate the use–mention distinction). Examples: Deuce means "two". The term panning is derived from panorama, which was coined in 1787. The most common letter in English is e." David Woodward ☮ ♡♢☞☽ 09:18, 23 August 2017 (UTC)

Warning - Problems

The formal basis of the article is problematic, since it works with sets (which are identical under permutations of elements) instead of with n-tuples. The German version of the article is much better and the reader might want to check that. Here, in the english version, the formalism is simply and plainly: Wrong. — Preceding unsigned comment added by 217.95.167.213 (talk) 10:20, 16 October 2019 (UTC)