Does the City Project Meet the Pareto Efficiency Criterion?
Does the City Project Meet the Pareto Efficiency Criterion?
Stanley Ryan, Your Supervisor
Read the following scenario and then answer the Problem Demonstration Questions below.
The allocation of resources relates to both business and government. State, local, and federal governments could use the Pareto efficiency criterion to measure the effectiveness of the government’s reallocation of resources. A reallocation of resources is a potential Pareto improvement project if, and only if, the gains could potentially exceed the losses.
You and Stanley Ryan, your supervisor and accountant in your consulting firm, need to prepare a Pareto efficiency criterion for a city project. Use the available resources below to decide whether or not the project will produce desirable gains.
The City Public Works Project will cost $900,000 and will benefit five different sections of the city. The City Benefit and Cost Share per Section is listed in the table below.
Section
City Benefit ($)
Cost Share ($)
1
100,000
75,000
2
200,000
250,000
3
300,000
350,000
4
100,000
50,000
5
200,000
100,000
If the total projected benefits exceed the total project cost, then the project is economically feasible.
The project would meet the Pareto efficiency improvement criterion if the cost benefit for each section of the city exceeds the cost share. For example, Section 1 is met because the benefit of the section is greater than the cost share of $75,000. However, in Section 2, the City Project would not meet the Pareto criterion because the Cost Share exceeds the City Benefit. Thus, the City Project would be approved in a city-wide referendum by a majority vote, although only for Sections 1, 4, and 5, because Sections 2 and 3 do not meet the Pareto criterion.
Problem Demonstration Questions
Answer the following questions by typing your answer underneath the questions, and then click on View Answer. With a total benefit of $900,000 for the city, and a total project cost of $825,000.
Is this project economically feasible for the city?
View Answer
Does the project meet the Pareto efficiency improvement criterion?
View Answer
Would this project be approved by a majority at a city referendum?
View Answer
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