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

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1) Element of value judgement: 
Pareto optimality is not free from value judgement. One 
should know the relative importance of commodities to different 
individuals before judging whether a given allocation is optimal or 
not. 
2) Limited applicability: 
 
Pareto criterion cannot evaluate a change that makes some 
people better off and other worse off. 
Since 
most 
government 
policies lead to changes that benefit some people and harm others. 
It is clear that the strict Pareto criterion is a limited applicability in 
the real world situation. 
3) Indeterminate:
 
In Pareto analysis every point on the contract curve ensures 
optimality. It is not possible to make a choice among the various 
alternatives on the contract curve. In the words of Henderson and 
Qund, ―The analysis of welfare in terms of Pareto optimality leaves 
a considerable amount of indeterminacy in the solution as these are 
infinite number of points 
which are Pareto optimal.‖
 
Check Your Progress: 
1. State the conditions to be satisfied for the attainment of 
Pareto efficient situation. 
2. What is Pareto optimality criteria? 
3. What are the deficiencies in Pareto analysis. 
 
 
 
 
 
 
 
 
 
 
6.4 
PERFECT 
COMPETITION 
AND 
PARETO 
OPTIMALITY 
 
In the previous section we studied the marginal conditions 
for the Pareto optimality. All the marginal conditions are fully 
satisfied under perfect competition. It is under perfect competition 
that product prices are everywhere equal to marginal costs, and 
factors prices are everywhere equal to their marginal value 
productivity. These requirements are essential but not enough to 
satisfy the marginal conditions. In addition, all buyers and sellers of 
goods and services must have perfect knowledge about market 
conditions, returns to scale must be constant and all factors must 

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be perfectly mobile so that all producers earn only normal profits. 
Thus these requirements of perfect competition are necessary for 
the satisfaction of the marginal conditions. This has led economists 
to characterise every competitive equilibrium as a Pareto-optimum 
and every Pareto-optimum as a competitive equilibrium. To 
examine this problem, we lay down the conditions necessary for the 
attainment of Pareto optimality under perfect competition.