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3) a) Discuss in detail why market fails to achieve economic efficiency.         (10 marks) 3)b) Based...

3) a) Discuss in detail why market fails to achieve economic efficiency.        

3)b) Based on an Edgeworth box, discuss how Pareto efficient allocation can be reached through the tradings between two individuals (A and B) and two goods (X and Y)
                                                           

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Answer #1

3a) Market fails to achieve economic efficiency when goods produced in an economy is more or less than the optimum level of economy. There could be several reason why efficiency is not met. These are:

  • Monopoly market
  • Price floor / Price ceiling imposed by market
  • Tax/Subsidies given by government to people

A fall in consumer or producer surplus or a rise in deadweight loss will create the situation of social inefficient output level.

3b) As per economic theory, Pareto efficient is an economic notion when one party cannot be made better off without making other one worse off. To raise efficiency, we can fix one person consumption level or utility level and tries to raise utility of other person. When there is a tangency among isoquant of two individuals, there comes a situation of Pareto optimality.

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