History of Economic Thought. Economic theory of welfare V. Pareto. "Pareto optimum" (the most important)

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History of Economic Thought. Economic theory of welfare V. Pareto. "Pareto optimum" (the most important)

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59. WELFARE ECONOMIC THEORY V. PARETO. "OPTIMUM PARETO"

Economic theory of welfare V. Pareto found its origins in utilitarianism - ethical theory, recognizing the usefulness of an act as a criterion of its morality.

Vilfredo Pareto (1848-1923) believed that political economy should explore the mechanism of the established balance between the needs of people and the limited means of satisfying them.

V. Pareto contributed to the development theories of consumer behavior, introducing ordinal concepts instead of the quantitative concept of subjective utility, which meant the transition from cardinalist to ordinalist version of marginal utility theory.

Instead of comparing the ordinal utility of individual goods Pareto offered a comparison of their sets, where equal preferred sets were described by indifference curves. These principles formed the basis of modern theories of consumer behavior.

Famous Pareto principle of optimality, which underlies welfare economics.

original premise Pareto theorems steel views Bentham and other early representatives of utilitarianism among economists that the criteria for happiness (considered as pleasure or utility) of different people are comparable and additive, that is, they can be summed up in some general happiness for all. By Pareto, optimality criterion is not the general maximization of utility, but its maximization for each "separate individual within the limits of possession of a certain initial stock of goods.

The firm in the production of products uses a set of production possibilities that provides it with the maximum difference between gross revenue and gross costs. The consumer seeks to purchase such a set of goods that brings him maximum utility.

The equilibrium state of the system assumes optimization of objective functions (the consumer has maximum utility, the entrepreneur has maximum profit), while the equilibrium state is considered to be such a state in which it would be impossible to improve the position of any of the participants in the exchange without worsening the position of at least one of the others, and such a state can be achieved within the competitive equilibrium model.

The essence of Pareto's views can be reduced to two statements:

1) any competitive equilibrium is optimal (direct theorem);

2) the optimum can be achieved by competitive equilibrium, which means that the optimum selected based on certain criteria is best achieved through the market mechanism (the inverse theorem).

Optimum state of objective functions ensures balance in all markets.

Optimization of target functionsBy Pareto, means choosing the best alternative from all possible by all participants in the economic process. The choice depends on prices and the initial volume of goods that the subject has, and by varying the initial distribution of goods, we change both the equilibrium distribution and prices.

Market equilibrium is the best position within the already formed distribution system, and the model Pareto presupposes society's immunity to inequality.

Author: Tatarnikov E.A.

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