What is the importance of the initial distribution of resour

What is the importance of the initial distribution of resources in determining what the distribution of resources will be after all Pareto improvements have been made?

Solution

The concept of Pareto optimum or economic efficiency stated above is based on a welfare criterion put forward by V. Pareto. Pareto criterion states that if any reorganisation of economic resources does not harm anybody and makes someone better off, it indicates an increase in social welfare. If any reorganisation or change makes everybody in a society better off, it will, according to Pareto, undoubtedly mean increase in social welfare.

Thus, in the words of Prof. Baumol “any change which harms no one and which makes some people better off (in their own estnuauon) must be considered to be an improvement.” Parto criterion can be explained with the help of Edgeworth Box diagram which is based on the assumptions of ordinal utility and non-interpersonal comparison of utilities.

Suppose two persons A and B form the society and consume two goods X and Y. The various levels of their satisfaction by consuming various combinations of the two goods have been represented by their respective indifference curves.

These marginal conditions are based on the following important assumptions:

1. Each individual has his own ordinal utility function and possesses definite amount of each product and factor.

2. Production function of every firm and the state of technology is given and remains con­stant.

3. Goods are perfectly divisible.

4. A producer tries to produce a given output with the least-cost combination of factors.

5. Every individual wants to maximise his satisfaction.

6. Every individual purchases some quantity of all goods.

7. All factors of production are perfectly mobile.