Pareto Efficiency and Pareto Improvements I A Level and IB Economics

okay welcome to a micro video uh the concepts of pareto efficiency and pareto improvements in welfare are covered in this short topic video so plato efficiency is a concept that's often used in a level economics essays what does it mean well in neoclassical economics a pareto efficient result or outcome is any action that harms no one but it helps at least one person and we reach pareto optimality or pareto efficiency if the only only way to make one person better off is to make somebody else worse off and we can use the production possibility curve

or the production possibility frontier to illustrate the concept of pareto efficiency and also a pareto improvement in welfare pressure efficiency will occur on any point that lies on the production possibility frontier or curve itself because when the country is operating on a ppf it's not possible to increase output of goods or services without reducing the output of something else because we have to make an output sacrifice on the other hand when a country lies well within or below the ppf well we say there's an inefficient use of resources or an under utilization of scarce inputs

as we might have unemployment of labor and capital and land in that situation becomes possible for output of both the two goods and services we're showing on the x and the y axis to increase at the same time so let's take a look diagrammatically at this here's a production possibility curve or ppf it shows the maximum possible output combinations of two goods or services in this case wheat and beef that a country can achieve when all factor resources are fully and efficiently employed well if we have points on the curve both points a and b

are pareto efficient and indeed moving from a to b involves a sacrifice we're increasing our output of beef from b1 to b2 there's an opportunity cost here we're sacrificing some production of wheat but a and b would both be pareto efficient they lie on the curve in contrast combinations including for example points c and d well they're well within the ppf and that shows an inefficient or under utilization of resources that is pareto inefficient well if we think about a combination of c and a combination at a remember a lies on the curve c lies

beneath the curve uh so i'm just going to draw to the axes there we'll put some numbers in this is just for illustration uh that's c is plato inefficient but of course if we if we could move towards the curve and move from c to point a that would be a pareto improvement because we can increase the output of both products uh moving from within the ppf to a point on the boundary itself and likewise the movement from c to d would also be a pareto improvement quite important when you're discussing pareto efficiency and pareto

improvements to bring in the concept of equity or fairness in the distribution of income a result an outcome that may be a pareto improvement doesn't always mean uh this is a satisfactory or fair outcome there can still be often is inequality after a pareto improvement we need to see we need to focus on which groups which people which agents in the economy actually benefit from increased output of goods and services who gets the extra healthcare who gets the extra food who gets the extra access to education showing on a diagram of pay to improvement does

not imply a judgment about the equality of the final distribution or the impact on social welfare that's part of the wider discussion but there we go i've taken through a key diagram to show pareto efficiency and pareto improvements