Question

Although a competitive equilibrium is always Pareto efficient, a Pareto efficient outcome is not necessarily a competitive equilibrium. Explain. (It is sufficient to give an example of a Pareto efficient outcome that is not a competitive equilibrium and explain why it is not.)

Answer 1

There are the two welfare theorems.

First Welfare Theorem:
Any competitive equilibrium is pareto optimal (so here you have competitive equilibria implying pareto optimality).

Second Welfare Theorem:
Given certain assumptions, any pareto optimal allocation can be achieved as a price equilibrium. That is, there exists a set of prices and initial endowments which will result in the desired pareto optimal allocation.

The FWT is straightforward. The SWT is saying that if we have a desired pareto optimal allocation, we can construct a corresponding competitive equilibrium which will grant us this pareto optimal allocation.

Pareto efficiency is as good as you put into practice its base. Business wise speaking, Pareto principle says 80% of your business/sales come from 20% of your customers. This shows you where too focus. Imagine you have 20 customers, most likely (I've been in business for a while in different areas and companies - besides my own business - and can tell you this is quite accurate) as I was saying, most like 4 of your customers are the ones who contribute to 80% of your sales. But as we're often so busy we don't realize it and we spend almost as much time with each customer because we think all customers are important and we have the duty to treat them equally.

Not necessarily, and this isn't being irresponsible or respectfulness to some customers. Very often, smaller customers are the more demanding and the one with more complains. If they have good potential of course invest time and effort on it, otherwise shift your energy and time on those who really contribute and sustain your business.