ECON301 Lecture Notes - Lecture 9: Pareto Efficiency, Contract Curve, Edgeworth Box

• School: University of Waterloo
• Department: Economics
• Course: ECON301
• Professor: Corey Van De Waal

Document Summary

Now let"s extend our pareto optimal concept to a production economy . We need to consider both the exchange efficiencies and the production efficiencies in this framework. Given exogenously fixed quantities of aggregate goods endowments x and y, the pure exchange economy provides. Pareto optimal allocations of goods x between consumers a and b. Given exogenously fixed quantities of aggregate factor endowments k and l, the production side will provide pareto optimal allocations of factors k and l between two producers, producer x & producer y. To combine these efficiencies into our production economy we use the following general strategy: [1] take the quantities of aggregate factor endowments k and l as exogenously given. [2] solve the production side for pareto optimal factor allocations, and hence the corresponding output levels x and y on the ppf (production possibility frontier). This ensures the production efficiency in the economy.