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Definitions and Illustrations of the Concepts of Pareo and Nash Equilibria

In: Business and Management

Submitted By cttshr
Words 2188
Pages 9
Definitions and illustrations of the concepts of Pareo and Nash equilibria.

PARETO OPTIMUM/EQUILIBIRUM/EFFICIENT

The idea of pareto optimum runs through all aspects of economics, for example, comparing different tax rules, and not just in game theory. It gained currency as a test to be applied in selecting economic policy as a result of a contradiction in the theory of the market deriving from the philosophy of utilitarianism. Utilitarianism could be construed as a justification for the oppression of the individual in the name of the greater good of society. This approach sits uncomfortably with the libertarian ideals of market economics, which put the individual above church and the (feudal) state, and by implication above the monarch in direct challenge to feudal rule. (see, eg, http://www.google.co.uk/#hl=en&source=hp&biw=1126&bih=425&q=Shanti+Chakravarty+neoliberal&btnG=Google+Search&aq=f&aqi=&aql=&oq=Shanti+Chakravarty+neoliberal&fp=45f26fda8f9185dd). To get around the difficulty posed by classical utilitarianism, market efficiency theorems came to rely on the idea of ordinal utility which does not allow for inter-personal comparison of utility. The paretian criterion explicitly rejects inter-personal comparison in arriving at economic policy.

The paretian criterion is focused entirely on the individual. A pareto optimum is a state of affairs whereby NO ONE, no individual, can be made better off without making someone worse off. Since no one is above anyone in the individualistic view of libertarian philosophy, economists can only suggest, in their capacity as professionals whose own personal preferences must not be allowed to colour their professional advice, a change in the organisation of privileges when no one is made worse off in consequence. Whilst the paretian criterion was a subversive idea in a feudal world, it is also a deeply conservative...

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