Lecture 7: Pareto Optimality

Om kurset

How do we divide the social pie of the available resources in an economy across its household members? Economists have a way of figuring out what allocations of consumption bundles are efficient, or what allocations are not. Crucially, this is different from taking a stand on the appropriate distribution of income. Confusion on this subject, equity vs. efficiency, abounds in the popular press. An application is discussed: the Pareto optimal allocation of risk implemented with risk sharing rules—who gets what when there are adverse shocks.