Comments on: Friday Economics 101 quiz time!

By: notsneaky

notsneaky — Mon, 28 Apr 2008 18:46:58 +0000

But that’s really just the case with 2 goods.

By: Mark Picton

Mark Picton — Mon, 28 Apr 2008 13:08:48 +0000

There are two pretty important restrictions – ie pieces of information the central planner has – on the utility functions in the question: that my welfare depends only on own consumption of goods and that my utility depends only on my own welfare.

There is nothing in standard consumption theory that requires selfish or self-regarding preferences – they are a special case. For me, “all the cake to me and none to my daughter” is not a Pareto optimal allocation. I would be better off if she had a slice.

By: concerned_economist

concerned_economist — Mon, 28 Apr 2008 03:04:57 +0000

This entire exchange (question, “answer” and comments) is ridiculous. As a casual reader of CT I am sometimes struck by how often the posts and comments have strident anti-economics perspectives. To start a thread by posing a question (a “pop quiz”) which supposedly three economists answered incorrectly only to then post the incorrect answer yourself is an embarrassment. To get publicly hung by your own noose at the hands of an econ grad student is just deserts.

By: notsneaky

notsneaky — Sun, 27 Apr 2008 18:53:14 +0000

Ok but then you could’ve just said “suppose total size of the pie is fixed and one person gets all of it. Then that’s Pareto Efficient” by the way of illustration. I can see why folks above were thinking that you were making some kind of statement about the comparative information needs of a centrally planned economy and a market one.

Also, no, by itself it’s not a very good criterion. It’s more of a necessary criteria than a sufficient one, since if you don’t have PO then you can always give more pie to someone, anyone.

By: newshutz

newshutz — Sun, 27 Apr 2008 17:10:42 +0000

Isn’t the key bit of information the central planner needs is how much of G can he take for himself?

“All animals are equal, but some animals are more equal than others”

By: dsquared

dsquared — Sun, 27 Apr 2008 16:23:41 +0000

What does that have to do with Pareto optimality though?

it is by way of a demonstration that it isn’t a very good criterion by which to judge things.

By: notsneaky

notsneaky — Sun, 27 Apr 2008 00:20:04 +0000

That’s sort of the point of the Coase Theorem. If you got property rights you don’t need to worry about efficiency, just equity. But yeah, some people misuse it.

By: LizardBreath

LizardBreath — Sat, 26 Apr 2008 22:45:55 +0000

As a lawyer, again, whenever I try to use economics jargon I fuck it up. While ‘resource constraints’ may have been the wrong words, I meant, in lay language, budgetary constraints—someone without money to spend can’t bargain for anything regardless of how highly they value it, making where you place the initial entitlement quite important from a distributional justice point of view. (And of course this isn’t a flaw in the Coase theorem itself, this is a problem for nitwits who think that the Coase theorem means you don’t need to worry about where property rights are placed.)

By: notsneaky

notsneaky — Sat, 26 Apr 2008 22:23:44 +0000

Well, there’s all kinds of problems with the Coase “Theorem” (it was actually a subject of some recent Econ blog discussion, see for example Michael G’s blog: http://yetanothersheep.blogspot.com/2008/04/coase-theorem-still-dead.html)
but it doesn’t “ignore resource constraints”.

The resource constraints are taken care of in the definition of a non-Pareto-efficient allocation; a situation where it is POSSIBLE to make someone better of without making anyone else worse off.

By: LizardBreath

LizardBreath — Sat, 26 Apr 2008 17:55:51 +0000

There’s a lot of people out there who will make public policy claims based on the possibility of Coase-type bargaining; whoever has an initial right is unimportant because if someone else wants it more they can make a deal. This is nonsense, of course, because it ignores resource constraints (you can want something as much as you like, but if you don’t have the money you’re not going to successfully bargain for it), but it’s not uncommon nonsense.

As a lawyer, I’d say it’s a very common type of error among lawyers; you teach something purporting to be economics to a roomful of people who pride themselves on being cold-bloodedly logical, and most of whom have difficulty with simple arithmetic, you get some very confused thinking.

By: puzzled

puzzled — Sat, 26 Apr 2008 17:35:39 +0000

And exactly who would make such a claim? The first thing any teacher says after introducing the concept is that Pareto efficient is not necessarily desirable.

By: LizardBreath

LizardBreath — Sat, 26 Apr 2008 13:49:54 +0000

I think the point is that the ludicrously one-sided negotiated outcome can be Pareto optimal, and that anyone confusing “Pareto optimal” or “efficient” with “good” or “just” or “desirable” isn’t thinking clearly.

By: notsneaky

notsneaky — Sat, 26 Apr 2008 00:21:10 +0000

“a situation which begins with a ludicrously one-sided distribution, ends with a ludicrously one-sided negotiated outcome”

What does that have to do with Pareto optimality though?

By: notsneaky

notsneaky — Sat, 26 Apr 2008 00:20:06 +0000

Thinking about it some more I think local-non satiation + continuity will get you there after all.

By: ben saunders

ben saunders — Fri, 25 Apr 2008 23:53:42 +0000

My original answer was that utility is strictly increasing with cake. (Monotone or whatever that is in technical language).

Reading some replies, I think it may be a bit like the distinction between welfare and resource egalitarians. Did you want a Pareto optimal distribution of cake (i.e. no one can have more cake, without someone getting less)? If so, Daniel is right, no knowledge of utility functions is necessary.

If the aim is Pareto efficiency in the domain of utility, you would need to be sure both are gaining utility from all their cake to be sure that a transfer of cake wouldn’t lead to a loss-less utility gain.