Vilfredo Pareto
Pareto’s contribution to Economics
• Pareto was follower of Walras. He extended Walras’ general equilibrium concept and developed a refined version
• Pareto made a distinct analysis of income distribution .
• On the basis of statistical analysis , Pareto came to the conclusion that income distribution shows a high degree of constancy in different
countries at different times
• However, his data was not sufficient for the study of income distribution
• According to Pareto , constancy of inequality in the pattern of income distribution suggests inequality of human ability
Contd.
• Pareto pointed out that a reduction in inequality can be achieved by a rise in average income so that production grows faster than
population
Welfare Economics:-
• Pareto contributed substantially to the development of new welfare economics
• In his Manual of Political Economy , Pareto rejected the traditional concept of cardinal utility and restricted himself to the welfare
conclusions which did not depend on any interpersonal comparison of utility
Contd.
• Pareto defined optimum position as a situation when no body could be shifted to a higher indifference curve without causing a downward shift for someone else
• Following conditions are essential for satisfying the Pareto optimality 1-For the optimum allocation of goods , the marginal rate of
substitution (MRS) between any two goods must be equal for any pair of individuals who own the same two goods
2-For optimum degree of specialization, the marginal rate of
transformation(MRT) between any two products must be equal for any pair of firms which produce them
Contd.
3- The optimum utilization of factor can be achieved if the MRT between any factor and any good is the same for any pair of firms using the factor and
producing the goods
4-For optimum allocation of factors MRS between any two factors should be same for the firms
5-For optimum allocation another condition is that MRS in consumption between two goods for a consumer must be same as MRT between two goods in production
6-For the optimum allocation of a factor unit’s time, the MRS between leisure and income must be the same as the MRT between work and the product for the society
Contd.
7- For the intertemporal optimum allocation of assets at any two points of time must be the same for any two individuals
• The above Marginal Conditions(first order conditions) do not necessarily establish Pareto optimality
• Apart from these, we require some stability conditions which may be called the second order conditions
• The fulfillment of the second order conditions means that in the neighborhood of maximum welfare, all indifference curves must be convex to the origin and all transformation curves must be concave
• These conditions are said to be sufficient conditions
Contd.
• Pareto’s optimality can be easily attained if there is perfect competition
• There can be an infinite no of points on the contract curve in Edgeworth-box diagram, which can be Pareto optimum
