The Parisian Criterion | Economics Optional Notes for UPSC PDF Download

Introduction

• Pareto was the first economist to find out an objective test of social welfare maximum. Often called Pareto optimality, Pareto unanimity rule, Paretian optimum, social or general optimum, the Paretian criterion states that welfare is said to increase (or decrease) if at least one person is made better off (or worse off) with no change in the positions of others.
• In other words, any change which harms no one and which makes some people better off (in their own estimation) must be considered to be an improvement.
• Given certain rules of distribution, any economic reorganization is said to increase social welfare, if the welfare of some persons is increased without any decrease in the welfare of others. In terms of indifference curve analysis, an optimum position is one in which it is not possible to put any person on a higher indifference curve without causing someone to drop to a lower one.
• By defining a welfare position in terms of ordinal utility, Pareto rejected the notion of cardinal measurement of utility and by so doing he dispensed with the need for interpersonal comparison of utility. Let us explain Pareto’s criterion with the help of utility possibility curve, as in Fig. 1

• Suppose there are two individuals A and В sharing a given bundle of good X. A’s utility is represented on the horizontal axis and B’s utility on the vertical axis. Thus BA represents utility possibility curve of all combinations of the individual utilities.
• The Paretian criterion shows that any change which causes a movement from С to F on the production possibility curve BA is an improvement because it makes both individuals better off thereby maximising their welfare.
• Similarly, a movement from С to D or E on the BA curve is an improvement for it makes at least one person better off without making the other worse off. But any point outside the segment DE is not a Pareto improvement. For instance, any movement from С to H increases B’s welfare at the expense of A’s welfare.

Criticism:

The Pareto criterion, as pointed out by Dr. Graaf, is free from making any interpersonal comparisons. It is based on a very broad ethical positive view that ‘one should always do well to all’. But it has its weaknesses.

• There can be an infinite number of Paretian Optima, each with a different level of welfare. As pointed out by Pareto himself, there are an “infinite number of points at which maxima of individual optimalities are attained.” This criterion ex- plains little or nothing as to how it can be determined, whether one optimum position is better or worse than another optimum position. To take Boulding’s smile of the Paretian criterion ‘as a mountain having many peaks’.
  • If ‘height’ denotes welfare, each peak represents an optimum position. If one were to choose the highest peak, it involves interpersonal comparisons. It is, therefore, not possible to find out the best of the optimum points of welfare.
  • According to Dr. Dobb the “so-called Pareto-conditions are quite insufficient to characterize a position as optimum. A situation where they are fulfilled may well be inferior to a number of other situations where they are not fulfilled.” Strictly speaking, each Paretian optimum is sub- optimal. The Pareto optima are, thus, comparatively unimportant, accordingly to Dr Little.
• Not Possible to Judge Many Policy Proposals. There are many policy proposals which cannot be judged with the help of this criterion. It does not apply to any policy proposal which benefits some and harms others. According to Baumol, “The Pareto criterion works by sidestepping the crucial issue of interpersonal comparison and income distribution, that is, by dealing only with cases where no one is harmed so that the problem does not arise.”
• The Paretian Criterion is not free from Value Judgements. To say that it is possible to make every person better off without making any other person worse off is a value judgement in itself. Though Pareto used the method of ordinal measurement of utility, yet he could not present a value-free criterion.
• Pareto evaluates only Unambiguous Changes in Welfare. In his efforts to avoid interpersonal comparisons, Pareto evaluates only ‘unambiguous’ changes in welfare. The Paretian welfare criterion is, thus, of little use in making policy recommendations. For instance, in terms of Figure 1, a movement from С to any points on the segment DE is not always an unambiguous increase in welfare. There may be other optimum welfare positions on the utility possibility curve BA outside DE.

According to Boulding, there are two types of changes in social welfare:

• Those which benefit all or at least one person through trading;
• Those which benefit one person at the expense of the other through conflict. The Paretian criterion relates to the welfare optimum reached through trading whereby all or at least one person becomes better off without making any other person worse off. But this view is unrealistic, for all economic policies in a way benefit some persons and harm others. Thus the Paretian criterion lacks universal validity and renders welfare economics useless and sterile.

Conclusion

Barone in his efforts to make the Paretian criterion realistic introduced the idea of a compensating payment. According to him, a change that makes one person better off and other worse off can lead to his economic welfare, if the gainer compensates the loser so that each returns to his original welfare position. But neither Barone nor Kaldor and Hicks after him, insisted on making actual payments. Scitovsky did suggest compensating payments being made actually. But all these efforts have not helped the welfare economists in evaluating policy changes on purely positive premises contrary to the Paretian criterion.