What is the definition of Pareto Efficiency? Explain why economists find the concept useful. What are its limitations?

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Sarah P


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May 21, 2014








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The Second Welfare Theorem states that any market that is Pareto efficient will have a set of given prices that creates competitive equilibrium in the economy. Economists may use this concept for game theory in particular. There are, however, many limitations. There is still some lack of clarity as to where the consumers end up in the end because it only takes into account the preferences of specified consumers and does not pay attention to consumers not included...
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For Pareto efficiency to prevail, an equitable wealth distribution is not necessary. For example, an economy where the wealthy own most of the resources may be Pareto efficient. Hence, it may not always be desirable. Another limitation is that taxes, either direct or indirect, may lead to an inefficient allocation...
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