Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

6.2 PARETO OPTIMALITY CRITERION OF SOCIAL 
WELFARE 
 
Promotion of economic welfare is generally accepted as an 
important goal of economic policy. Welfare economic is an 

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important branch of economics which is concerned with the 
evaluation of alternative economic limitations from the point of view 
of the well being of the society. 
The measurement of social welfare requires the use of Pareto 
optimality criteria.
Pareto optimality criteria refer to economic efficiency which 
can be objectively measured. It is named after the famous Italian 
economist Vilfredo Pareto. According to this criterion, any change 
that makes at least one individual better off and no one worse off is 
an improvement in social welfare, conversely a change that makes 
no one better off and at least one worse off is a decrease in social 
welfare. 
 
Pareto criterion can be alternatively stated as 
“an allocation is 
Pareto efficient under a given set of consumer taste, technology 
and resources, if it not possible to move to another allocation which 
could make some people better of
f and nobody worse off”. 
 
Three marginal conditions are to be satisfied for the attainment 
of Pareto efficient situation.
a) efficiency of distribution of commodities among consumers. 
b) efficiency of allocation of factors. 
c) Efficiency in the allocation of factors among commodities. 
According to the first condition the marginal rate of 
substitution between two goods must be same for all the 
consumers‘ i.e.
Where X and Y are commodities, A and B are individuals. 
According to the second conditions i.e. efficiency in 
production, the marginal rate of technical substitution (MRTS) 
between labour and capital must be equal for all commodities i.e. 
Where X and Y are commodities and L and K are labour and 
capital. 
According to the third condition the marginal rate of product 
transformation is equal to marginal rate of substitution for the same 
goods in consumption i.e.