Simple and practical efficiency lessons

ABSTRACT

The derivation of conditions necessary for Pareto efficient production and exchange is a lesson frequently showcased in microeconomic theory textbooks. Traditional delivery of this lesson is, however, limited in its scope of application and can be unnecessarily convoluted. The author shows that the universe of application is greatly expanded and a more transparent logic is embraced by noting that definition of Pareto efficiency directly implies the tangency of aggregate production/endowment and aggregate weakly preferred sets. This tangency condition can itself serve as a necessary condition for Pareto optima. For convex, but not necessarily differentiable, environments this tangency condition implies nonempty intersection of multi-valued marginal rates of substitution and transformation rather than outright identity.

KEYWORDS:

• convex analysis
• Pareto efficiency
• private ownership economy

JEL CODES:

• D51
• D61

Acknowledgments

The author is grateful to the editor, associate editor, and two anonymous reviewers for their constructive comments and suggestions, which served to significantly improve this article.