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

A
B
XY
XY
MRS
MRS
X
Y
LK
LK
MRTS
MRTS
XY
XY
MRT
MRS

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It should be noted that a situation may be Pareto optimal 
without maximisation of social welfare. However, welfare 
maximisation is attained only at a situation i.e. Pareto optimal. 
The main limitation of Pareto criteria is that it cannot 
evaluate a change that makes some people better off and others 
worse off. 
6.3 MARGINAL CONDITIONS FOR A PARETO 
OPTIMAL RESOURCE ALLOCATION 
 
Pareto optimality criteria refer to economic efficiency which 
can be objectively measured. It is called Pareto criterion, after the 
famous Italian economist Vilfredo Pareto.
Pareto has disagreed with the neo-classical approach to 
welfare. The neo-classical economist believed that the term social 
welfare refers to the sum total of individual utilities which are 
cardinally measurable. Pareto‘s disagreement with the neo-
classical approach is because; 
1) non acceptance of the cardinal measurement of utility. 
2) Rejection of interpersonal composition of utility. 
According to Pareto criterion, any change that makes at 
least one individual better off and none worse off is an improvement 
of social welfare. Conversely a change that makes no one better 
and at least one worse off is a decrease in social welfare. 
This criterion can be alternatively stated as follows: 
―An allocation is Pareto efficient under a given set of 
consumer taste, technology and resources. If it is no possible to 
move to another allocation which could make some people better 
off and nobody worse off.‖ 
Prof. Baumol has stated the same idea in the following words, 
―Any change which harms no one and make some people better off 
in their own estimation must be considered to be an improvement.‖ 
For the attainment of Pareto optimal situation in an 
economy, three marginal conditions are to be satisfied. 
1) efficiency of distribution of commodities among the 
consumers (efficiency in exchange). 
2) efficiency of the allocation of the factors among firms 
(efficiency of production). 
3) efficiency in the allocation of factors among commodities 
(efficiency in product mix or composition of product) 

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