Microeconomics Question from Walter E. Williams:[]

Explain what is meant by "Pareto optimal." Why is it used so widely? (Do not state all the conditions that must hold for it to exist.) Is it consistent with compulsory licensing of doctors, prescriptions for drugs, approval by the Securities and Exchange Commission before securities are sold, tariffs, franchises for public transportation, minimum wage laws, non-exchangeable rights to be a U.S. citizen, anti-discrimination laws and anti-murder laws? Explain.


A situation is Pareto Optimal if and only if no one can be made better off without making someone else worse off. It is widely used as a way to gauge the net social welfare of a change. All of the regulation mentioned, with the exception of murder, involves voluntary exchange between parties, and serve as an impediment to the proposed exchanges. If an exchange is voluntary on the part of all parties, then the exchange can be considered a pareto improvement, with welfare gains for all parties. Regulation inhibiting such exchange is undesirable. Murder, unless it is at the request of the party being murdered (assisted suicide), does not fit this mold. In cases where it is at the behest of the victim, it is impossible to verify assent after the fact. Therefore, regulation is perhaps well advised.

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