Pigou Creates Losers: On the Implausibility of Achieving Pareto Improvements from Efficiency-Enhancing Policies

Why are distortionary policies used when seemingly Pareto improvements exist? According to a standard textbook argument, a Pareto improvement can be obtained by eliminating the distortions, compensating the losers with a lump sum transfer, and redistributing the gains that are left over. We relax the assumption that winners know the losses suffered by the losers and show that the informationally efficient method of compensating losers may involve the use of seemingly inefficient (but informationally efficient) distortionary policies. The risk of overcompensating losers may make distortions informationally efficient, as there are points on the Pareto frontier where distortions are used.

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The Hidden Advantage of Promises: Pareto Improvements in a Gift-Exchange Game

AEA Randomized Controlled Trials ◽

10.1257/rct.3533-1.0 ◽

2018 ◽

Author(s):

Peilu Zhang

Keyword(s):

Gift Exchange ◽

Pareto Improvements

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Puzzles: Sylvia, Ice Cream and more

The Journal of Economic Perspectives ◽

10.1257/jep.2.3.175 ◽

1988 ◽

Vol 2 (3) ◽

pp. 175-182 ◽

Cited By ~ 1

Author(s):

Joseph Farrell

Keyword(s):

Congestion Pricing ◽

Ice Cream ◽

Pareto Improvements

This installment of Puzzles includes answers to all the puzzles presented. The puzzles are titled: “Competition as a Welfare Minimum”; “Externalities Galore”; “The Utility of Ice Cream”; “Congestion Pricing”; and “Are There Pareto Improvements?”

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The Hidden Advantage of Delegation: Pareto Improvements in a Gift Exchange Game

The American Economic Review ◽

10.1257/aer.102.5.2358 ◽

2012 ◽

Vol 102 (5) ◽

pp. 2358-2379 ◽

Cited By ~ 63

Author(s):

Gary Charness ◽

Ramón Cobo-Reyes ◽

Natalia Jiménez ◽

Juan A Lacomba ◽

Francisco Lagos

Keyword(s):

Positive Reaction ◽

Strong Evidence ◽

Gift Exchange ◽

Pareto Improvement ◽

Pareto Improvements

This paper analyzes the effect on performance and earnings of delegating the wage choice to employees. Our results show that such delegation significantly increases effort levels. Moreover, we observe a Pareto improvement, as the earnings of both employers and employees increase when employers delegate than when they do not. Interestingly, we also find that the employees' performance under delegation is higher than under nondelegation, even for similar wages. While there is strong evidence that behavior reflects strategic considerations, this result also holds for one-shot interactions. A possible nonstrategic motivation explaining the positive reaction to delegation is a sense of enhanced responsibility. (JEL J31, J33, J41)

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When Can Partial Public Insurance Produce Pareto Improvements?

10.3386/w9035 ◽

2002 ◽

Cited By ~ 4

Author(s):

Amy Finkelstein

Keyword(s):

Public Insurance ◽

Pareto Improvements

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Pareto Improvements and Feasible Climate Solutions

Philosophy and Climate Change ◽

10.1093/oso/9780198796282.003.0016 ◽

2021 ◽

pp. 346-369

Author(s):

Katie Steele

Keyword(s):

Climate Change ◽

International Agreements ◽

Coordinated Action ◽

Pareto Improvements

Proponents of International Paretianism (IP)—the principle that international agreements should not make any state worse off and should make some at least better off—argue that it is the only feasible approach to reducing the harms of climate change. They draw on some key assumptions regarding the meaning of ‘feasibility’ and the nature of the Pareto improvements associated with coordinated action on climate change. This chapter challenges these assumptions, in effect weakening the case for IP and allowing for broader thinking about what counts as a ‘feasible’ climate solution.

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The Scope and Limits of Preference Sovereignty

Economics and Philosophy ◽

10.1017/s0266267100001553 ◽

1993 ◽

Vol 9 (2) ◽

pp. 253-269 ◽

Cited By ~ 40

Author(s):

Tyler Cowen

Keyword(s):

Initial Distribution ◽

Gains From Trade ◽

Costs And Benefits ◽

Distribution Of Wealth ◽

Ordinal Preferences ◽

Pareto Improvements ◽

Costbenefit Analysis ◽

The One ◽

Personal Welfare ◽

Source Of Information

Economists use tastes as a source of information about personal welfare and judge the effects of policies upon preference satisfaction; neoclassical welfare economics is the analytical embodiment of this preference sovereignty norm. For an initial distribution of wealth, the welfare-maximizing outcome is the one that exhausts all possible gains from trade. Gains from trade are defined relative to fixed ordinal preferences. This analytical apparatus consists of both the Pareto principle, which implies that externality-free voluntary trades increase welfare, and applied costbenefit analysis, which attempts to weight costs and benefits when evaluating policies that are not Pareto improvements.

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