Advantages Of Indivisibility

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2. Indivisibilities: The Paretian optimality is based on the assumption of complete divisibility of products and factors used in consumption and production. In reality, goods and factors are not infinitely divisible. Rather, they are indivisible. The problem of divisibility arises in the production of those goods and services that are used jointly by more than one person. An important example is of road in a locality. It is used by a number of persons in the locality. But the problem is how to share the costs of repairs and maintenance of the road. In fact, very few persons will be interested in its maintenance. Thus marginal social costs and marginal social benefits will diverge from each other and Pareto…show more content…
But he does count this as a cost, yet it is a cost to society. Because the lake is a common property resource where there is no mechanism to restrict entry and to catch fish. The fisherman who catches more fish imposes a negative externality on other fishermen so that the lake is…show more content…
Thus when property rights are common, indefinite or non-existent, social costs will be more than private costs and there will not be Pareto Optimality. 4. Imperfect Markets: Pareto efficiency increases under perfect competition. But it declines under market distortions or imperfections. Let us consider a case of monopoly. Initially, monopoly equilibrium is at point E where the private marginal cost curve, PMC, cuts the marginal revenue curve, MR, from below. The monopolist produces OQ1 output at OP1 price. But the production process generates smoke in the air. Therefore, the pollution board levies a tax equal to ТЕ on the monopoly firm. The imposition of a pollution tax is, in fact, a fixed cost to the monopoly firm. Now the social marginal cost curve cuts the marginal revenue curve at point e. The monopolist increases the price of his product from OP1 to OP2 and restricts output to OQ2 and thereby reduces consumers’ surplus to Q2 MLQ1 (= OQ1 LP1 – OQ2 MP2). In fact, Q2 MLQ1 is the social cost of OQ2 output. But the net loss to society is Q2 MLQ1 – TE= eMLT, the shaded area in the
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