Criticisms of Pareto Criteria Flashcards
What is a criticism of the individualistic / liberal approach in Pareto criteria?
Pareto relies on individuals’ own subjective judgement of wellbeing i.e. second postulate but society often takes a contrary view incl legal prohibition (drugs), merit goods and demerit goods (underconsumed or overconsumed with faulty utility functions)
** What is the criticism of inter personal utility comparisons?
Pareto is unable to tell us if there is a welfare gain or loss despite the fact we observe both gainers and losers.
e.g. HS2 rail link to Birmingham, break up of monopoly etc . EXPAND
We solve this via Kaldor Hicks Criterion / compensation principle
What is the compensation principle?
Following a reallocation of goods, if gainers can in principle compensate losers and still be better off then social welfare has improved.
Because compensation is not actually paid it is also known as the Potential Pareto Improvement.
If compensation was actually paid it would be a straightforward Pareto improvement.
Draw the Compensation Principle
Page 12
What is the Scitovsky Paradox?
Compensation Principle suggests an unlimited increase in welfare is possible,
arises as compensation principle considers distributional issues only (movements along a upc) and ignores changes in the product mix (movements BETWEEN upcs)
Draw the Scitovsky Paradox
Page 13
Why may we need to consider alternatives to Pareto?
He treats all individuals identically, irrespective of characteristics (millionaire / beggar)
Describe Rawls welfare system
Individuals are placed behind a ‘veil of ignorance’ , and do not know what member of society they are. Argues individuals would agree to maximise wellbeing of least well off member of society i.e. maxmin approach where smallest utility is maximised.
W = 1 (u1, u2….. un) = min (u1, u2 … un)
Describe egalitarianism
Social welfare only improves if utilities are made more equal.
Might represent this by :
W = W (u1, u2 … un) = 1 / standard deviation
As standard deviation gets smaller, social welfare gets bigger.
Describe Nietszche social welfare system
Opposite to Rawls, maximise the utility of the most well off individual
i.e. (u1, u2, u3 …)
Describe utilitarianism social welfare system
‘Maximise the greatest good of the greatest number’ which leads to the Benthamite or utilitarian welfare function:
W = W (u1, u2, …. un) = u1 + u2 + un
What are the disadvantages of utilitarianism ?
a. utility is measured cardinally (via numbers) so can’t measure ordinally
individual utilities are added together pre-dating pareto
b. marginal utilities are equal for a welfare optimum
i. e. identical individuals get an equal share - known as ‘horizontal equity’ following from the Fourth Optimality condition
individuals with poor utility functions get a smaller share (weak on vertical equity
show the issue with utilitarianism on a diagram
page 14
