2. © Allen C. Goodman, 1999 Equity and Need © Allen C. Goodman, 1999

3. What is Pareto Efficiency? Abner Belinda Spam, S Medical visits, M SASA MAMA SBSB MBMB We have an economy in which we have Spam S and Medical visits M. Abner has the endowment S A of Spam, and M A of medical visits. Belinda has the endowment S B of Spam, and M B of medical visits.

4. © Allen C. Goodman, 1999 What is Pareto Efficiency? Abner Belinda Spam, S Medical visits, M SASA MAMA SBSB MBMB We can look at Abner’s preferences with “blue” indifference curves. They go from “southwest” to “northeast.” We can look at Belinda’s preferences with “red” indifference curves. They go from “northeast” to “southwest.”

5. © Allen C. Goodman, 1999 What is Pareto Efficiency? Abner Belinda Spam, S Medical visits, M SASA MAMA SBSB MBMB How does Abner value Spam relative to visits? Answer: He’d give a lot of Spam for an extra visit! He values visits a lot. How does Belinda value Spam relative to visits? She would trade a lot of visits for a little bit of Spam. She values Spam a lot.

6. © Allen C. Goodman, 1999 What is Pareto Efficiency? Abner Belinda Spam, S Medical visits, M SASA MAMA SBSB MBMB Abner will trade Spam for visits. But since Belinda wants Spam a lot, Abner can get a better trade than otherwise. Belinda will trade visits for Spam. But since Abner wants visits a lot, Belinda can get a better trade than otherwise.

7. © Allen C. Goodman, 1999 What is Pareto Efficiency? Abner Belinda Spam, S Medical visits, M SASA MAMA SBSB MBMB What happens? Abner is better off. So is Belinda! Can either trade and do any better? No!

8. © Allen C. Goodman, 1999 What is Pareto Efficiency? Abner Belinda Spam, S Medical visits, M SASA MAMA SBSB MBMB What has happened? Both are better off. Suppose we had started at another endowment We won’t get to the same point, but we’ll get to another point where trading won’t help us.

9. © Allen C. Goodman, 1999 What is Pareto Efficiency? Abner Belinda Spam, S Medical visits, M SASA MAMA SBSB MBMB Now we play “connect the dots.” We call this a “contract curve.” What does it mean? Let’s finish it up!

10. © Allen C. Goodman, 1999 Let’s Review Pareto Efficiency? Abner Belinda Spam, S Medical visits, M We must recognize that point X is Pareto Optimal. So is point Y. X Y

11. © Allen C. Goodman, 1999 Equity v. Efficiency What is efficiency? Discuss. What is equity? Discuss.

12. © Allen C. Goodman, 1999 Utility Possibility Frontier We can plot Abner’s utility against Belinda’s Utility. Why do we draw it this way? Abner’s Utility Belinda’s Utility X Y What if we want a perfectly egalitarian society? Does equal utility mean equal allocations?

13. © Allen C. Goodman, 1999 Let’s work backward Abner Belinda Spam, S Medical visits, M In the last panel we decided to have equal utility. There is one point where that occurs. Doesn’t necessary mean equal allocations. X Y

14. © Allen C. Goodman, 1999 Utility Possibility Frontier What if our society says that we should provide MINIMUM utility for each? Abner’s Utility Belinda’s Utility X Y B min A min If people like Abner control things, we get point A. A If people like Belinda control things, we get point B. B This will take us back to particular points on the contract curve.