Friday, June 03, 2005
Economics Friday
Pareto Efficiency
When economists talk about efficiency they don’t just mean counting paper clips, clock-watching and using both sides of a piece of paper. They are usually talking about Pareto efficiency (we’ll ignore the other types of efficiency for now).
Pareto improvements are made when there is a movement from one allocation of resources to another whereby at least one individual becomes better off, and none are made worse off. If no such improvements can be made, the situation is Pareto efficient (on the production possibility frontier and all that).
Hold onto your hats because another vital concept is coming:
Opportunity Cost
Not monetary cost like you thought. This is all about the opportunity foregone - what was the best alternative use of resources. So the cost of a CD is not just £12.99, it’s a couple of hours in the pub, or a night in the cinema – perhaps to see I, Robot – and some popcorn, or a deposit in a building society and £15.00 in a year’s time.
So when the government talks about £x million going in to education or health, the response should not be, “Yes. That sounds good. £x million must be doing something…” it’s, “Could something better be done with that money?” or, “could the same result (whatever it may be) be achieved with less money?” And as a side issue, and one that may come up on another Friday, it does matter: this is our money that is being spent, it is the result of our labour. Tax is taken from us. We do not work for the government: we should not be grateful for what they let us keep, we should be fastidious in checking what they spend.
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Pareto Efficiency
When economists talk about efficiency they don’t just mean counting paper clips, clock-watching and using both sides of a piece of paper. They are usually talking about Pareto efficiency (we’ll ignore the other types of efficiency for now).
Pareto improvements are made when there is a movement from one allocation of resources to another whereby at least one individual becomes better off, and none are made worse off. If no such improvements can be made, the situation is Pareto efficient (on the production possibility frontier and all that).
Hold onto your hats because another vital concept is coming:
Opportunity Cost
Not monetary cost like you thought. This is all about the opportunity foregone - what was the best alternative use of resources. So the cost of a CD is not just £12.99, it’s a couple of hours in the pub, or a night in the cinema – perhaps to see I, Robot – and some popcorn, or a deposit in a building society and £15.00 in a year’s time.
So when the government talks about £x million going in to education or health, the response should not be, “Yes. That sounds good. £x million must be doing something…” it’s, “Could something better be done with that money?” or, “could the same result (whatever it may be) be achieved with less money?” And as a side issue, and one that may come up on another Friday, it does matter: this is our money that is being spent, it is the result of our labour. Tax is taken from us. We do not work for the government: we should not be grateful for what they let us keep, we should be fastidious in checking what they spend.
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