You value your favorite shirt at $100. Someone else values it at $80, and that person is willing to pay you $80 for your shirt. Would selling your shirt to this person for $80 be Pareto efficient?
A) Yes, because any time you engage in trade, the result must be Pareto efficient.
B) No, the person paid you $80 for the shirt so his net benefit was $0, while your net benefit was -$20. For this change to be Pareto efficient, each of you should have the same net benefit.
C) Yes, because even though you lose from the trade and he gains, there is the potential for him to compensate you for your loss.
D) No, because both of you are not better off as a result of the trade.

Question

Quizplus · Accepted Answer

Pareto efficiency requires that no one can be made better off without making someone else worse off. In this scenario, you are worse off by $20 (the difference between your valuation of $100 and the sale price of $80), making the trade not Pareto efficient since you are not better off after the trade.

You Value Your Favorite Shirt at $100