The Pareto welfare criterion requires that welfare improvements for Essay

The Pareto welfare criterion requires that welfare improvements for some are not achieved at the expense of damages to others. As it is impossible to imagine a - Essay Example As a decision-making tool, the Pareto chart provides facts and insights necessary for setting priorities. Pareto set up a welfare criterion known as the Pareto optimum which turned out to be an introductory perception in the theory of welfare. This Pareto optimum introduced by Vilfredo is a situation of dealing in which no individual can be improved through welfare while making the other individual worse off. If a change in the economy is in the positive and no individual is worsened off on the cost of one individuals betterment then it is known as Pareto improvement. It can also be said that the situation is Pareto superior. Pareto efficiency is a state resulting in an improvement in welfare of one or more individuals without adversely affecting the welfare of others. Pareto's theory was based upon the equal distribution of resources so that the well being of one person would not affect the well being of the other. This is not being achieved in the now world but in the recent years governments are taking steps to influence proper resource allocation. These steps include the introduction of public goods and services which are an exception and face no rival ness. The governments are increasingly getting involved in the field of semi public goods which are neither owned by the private or public sector companies. The governments provide subsidies which help in lowering the goods prices; lower the cost prices, impose tax penalties to limit the consumption or production of a good and mandate the goods or services like education on the public. This helps the government to properly allocate all the resources available. Tax penalties or legal punishments are enforced on the manufacturers by the government in order to limit the production or consumption of a good for e.g. pollution. They would impose excise taxes on products so that the production of harmful goods is dispirited for e.g. alcohol. The government also has an important role to play in the public Economic En terprises. They could invest more in their public sector and improve the goods in the market provided by them to the public at a much lowered price then available in the market. They could even privatize the companies so that natural monopolies are avoided in the market which exhibit increasing returns to scale. Such types of monopolies are taken over by the government on the basis of efficiency. The government would charge a price for the products less than the average cost and this shortage would be balanced by the tax revenues. And lastly the government could put on economic regulations so that the market works on a safety standard for e.g. providing licenses or patents, setting general anti-trust regulations and etc. This would help the government to change the pattern of resource allocation and thus attain the level of Pareto efficient allocation. Pareto efficiency has proved tremendously helpful for economists; The First Welfare Theorem affirms that when manufacturers and customers both are price takers, the equilibrium allocation is always Pareto efficient. For this reason, a competitive financial system fundamentally will distribute resources proficiently as customers can make the most of their utilities. The Second Welfare Theorem states that any market that is Pareto efficient will include a set of given costs that forms a competitive equilibrium in the economy. Many economists may and