Social Efficiency and the Perfect Market Economy

  • Peter Bohm


Economics is essentially about economising with scarce resources. The fact that resources are scarce implies that it is necessary to choose among alternative uses — alternative allocations of resources to sectors of production and alternative allocations (or distributions) of output to members of society. Our criterion for ‘good’ and ‘bad’ allocations of this kind is based on the following preconditions:
  1. 1.

    ‘Consumption is the goal of all production’. We assume that individuals are not interested in production per se, but only in the output of production in terms of immediate or future consumption as well as in the different kinds of sacrifices that production entails (work, environmental degradation, etc.).

  2. 2.

    Consumption and sacrifices are evaluated in the light of the preferences of the individual members of society (‘consumer’s sovereignty’). We assume that these preferences are formed on the basis of ‘sufficient’ information about consumption alternatives. In fact, to begin with, we assume that information is complete (‘perfect information’). (Later on, it will be observed that information may be incomplete and that the government may express and enforce a guardian attitude with respect to the consumption pattern exhibited by individual consumers.)

  3. 3.

    We shall be on the lookout for feasible changes in the economy which would make all consumers better off, or at least make one consumer better off without making others worse off. Obviously, when the possibilities of making such changes are exhausted, we are left with an allocation of resources and output that cannot be altered without someone being made worse off. Such allocations — there may be many — are called Pareto-optimal allocations or socially efficient allocations, sometimesjust ‘optimal’ or ‘efficient’, for short.



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Copyright information

© Peter Bohm 1987

Authors and Affiliations

  • Peter Bohm
    • 1
  1. 1.StockholmSweden

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