I am a Japanese person studying economics by myself.
This may be a beginner’s question, but is Pareto improvement realistic?
For example, with issues like high vs low interest rates, deflation vs inflation, tax increase vs tax cut, or big spending vs austerity, someone always wins and someone always loses. So I think true Pareto improvement is impossible.
There is also the idea of the "compensation principle," but I don’t understand why we need to make a policy that creates the need for compensation in the first place.
As a concrete case, in Japan we see a populism of "high welfare + tax cuts." But here, young people clearly lose because they must pay the inflation tax. Still, these young people are the main supporters of such populist governments. Old people, who do not risk losing social security in their short remaining life, may benefit. But this is not a Pareto improvement.
Is Pareto Improvement Real in Economics?
byu/Solstice_Cinder inAskEconomics
Posted by Solstice_Cinder
1 Comment
>I am a Japanese person studying economics by myself.
This may be a beginner’s question, but is Pareto improvement realistic?
>For example, with issues like high vs low interest rates, deflation vs inflation, tax increase vs tax cut, or big spending vs austerity, someone always wins and someone always loses. So I think true Pareto improvement is impossible.
That is mostly not how “Pareto efficiency” is used.
Of course lots and lots of things are not Pareto efficient choices. We choose to make a few worse off to make the vast majority better off all the time.
It’s useful to know what Pareto efficiency is because any *Pareto improving* change is basically a “free improvement” with no downsides.
That doesn’t mean any Pareto efficient allocation is also desirable. There are scenarios where it would be Pareto efficient for one person to hold all the wealth and the rest absolutely none. Of course nobody would think this is “good” just because it’s Pareto efficient.
>There is also the idea of the “compensation principle,” but I don’t understand why we need to make a policy that creates the need for compensation in the first place.
The point is to consider alternate choices.
If we have two policy options and one option greatly improves aggregate welfare *and* the gains are so great that you can use these gains to compensate the losers fully as well, this is clearly the better option. That’s the point. We are “creating the need for compensation” because we are choosing the option with the biggest net gain for everybody.