Learn some economics, be entertained...

2007-07-13 · Original WordPress address

Okay, lemme explain slowly the concept of Pareto Efficiency here because folks is confused. Suppose there's a total of 100$ in the economy and two people, Meriadoc and Pippin. If all of that 100 bucks is in some way fully divided between the two, then regardless of who gets what, the outcome is said to be Pareto Efficient. Not fair. Not just. Just efficient. But suppose that only 80$ gets divided between Meriadoc and Pippin with, say, Mary getting 79$ and Pip getting 1$. The other 20$ just lies there on the sidewalk rotting. Then we have inefficiency. We could pick up the 20$ and give it to Pip, or give it to Mary or split it up between them two. Even if we give it all to Mary, so that now he's got 99$ and Pip only 1$, assuming Pip and Mary don't care about relative status, only more money, then we can all agree that (Mary=99, Pip=1) is "better" or, more precisely, "more efficient", then (Mary=79, Pip=1). (If they do care about status or whatever, you can reformulate the problem in equivalent terms) Of course we may care about income distribution, inequality and all those other things. But that comes later. The PO criteria just says, if there's 20$ laying on the side, for goodness sake, pick it up and give it to someone, anyone. And that's the attractive property that a "usual" S&D equilibrium has - no 20$ left lying around rotting.