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Pareto Frontier


Pareto frontier shows dependency between welfare of people. In our case between welfare of Ms. Smith and that of Mr. Novak.

 

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.

Any point in an area between points A, B, and C represents Pareto improvement over point A.

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.  

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.

 

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).
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'

 

 

 

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