Suppose there is a water shortage, and the governor proposes that the government distribute equal quantities of water to each person at no cost to the consumers. If consumers were forbidden to trade water, would such a distribution be Pareto optimal?
A) Yes, because each person has the same amount of water as everyone else.
B) Yes, because everyone would be receive their water for free.
C) Not necessarily, as people may differ in their marginal rates of substitution between water and other goods.
D) It is impossible to determine without knowing the price of water.
E) none of the above

Question

Quizplus · Accepted Answer

Pareto efficiency requires that no one can be made better off without making someone else worse off. However, in this scenario, people may have different preferences for water relative to other goods. Some may place a higher value on water than others, and would be willing to give up more of other goods to obtain water. Thus, a distribution that gives everyone the same amount of water at no cost would not be Pareto optimal, as it would not take into account these differences in preferences.

Suppose There Is a Water Shortage, and the Governor Proposes