The government with intention of improving the interests of his citizen tries to use some economic principles in upgrading the nation’s welfare. One of the techniques can be use is improving the resource allocation of the country. With so many principles and methods that can be use in resource allocation, the problem is what principles that can fit the country’s characteristic and can give more benefits. Pareto optimal principle is one of the answers in improving resource allocation that can lead to improvement of the country’s welfare.
Every economist purpose is to reach the condition of Pareto Optimal. Pareto optimal is the resource allocation which has the property of no one can be better off without someone being worst off. It is the point where allocating resources to the different division, department, party or committee is efficient. It is the best property of resource allocation because it means improvements reach the peak or the maximum point. It means improvement can do no more good or provides no more benefits(Musgrave, 1984).
There are what we called Pareto Improvement and Potential Pareto Improvement. This two provides improvement but they provide it in different way. However, the two have the same goal, to reach the Pareto optimal.
Pareto improvement is the property of resource allocation where you continue to improve the welfare of one party without harming or affecting the other party negatively. It means redistributing resources from one party to another party does not affect the both party negatively. It means even you only improve one party as long as you do not sacrifice the interests of other party; still there are gains in welfare of the country. In this kind of improvements we have winners but no losers. For example, giving relief goods to the people who are the victims of great calamities, the people who donate the relief goods does not feel worst off but the people who gets the donation feel better off(Rosan, 1999).
Potential pareto improvement is the property of resource allocation where you redistribute resources from one party to other but you harm the former party. This means you improve the welfare of one party but you sacrifice the welfare of other party. These kinds of improvements have winners and also losers. However the winner can compensate the loser maybe by subsidy, giving money or goods. For example, the government collects tax in every citizen, this collection can effect the welfare of his citizen however the government compensates them by providing public goods (public roads and lightening the street) public buildings (hospitals and schools) and security(Rosan, 1999).
It is not the question which improvement is better because we can use the two in improving the welfare of the society. Both can provide pareto optimal that can lead to the society’s more welfare. However the acceptability of the people, the questions to whom to get and to who to give are questions need to be answer before redistribution of resources need to do. The ability to see the consequences not only in short run but also to the long run is also important to avoid the events which are not expected. The government needs also to know the impact of each improvement.
Musgrave, R. M. a. P. (1984). Public Finanace in Theory and Practice: McGraw-Hill Company
Rosan, H. S. (1999). Public Finance: McGraw-Hill Company