You value your economics textbook at $10. Someone else values it at $25, and that person is willing to pay you $20 for your textbook. Would selling your textbook to this person for $20 be Pareto efficient?
A) No, because you did not receive the maximum amount the other person would have been willing to pay for the textbook.
B) No, the person paid you $20 for the book so his net benefit was only $5, whereas your net benefit was $10. For this change to be Pareto efficient, each of you should have the same net benefit.
C) Yes, because both of you are better off as a result of the trade.
D) Yes, because even though you gain from the trade and he loses, there is the potential for you to compensate him for his loss.

Question

Quizplus · Accepted Answer

Pareto efficiency is achieved when no individual can be made better off without making someone else worse off. In this scenario, both parties benefit from the trade without harming the other, making the transaction Pareto efficient. You value the book at $10 but receive $20, and the other person values it at $25 and pays $20, so both parties are better off.

You Value Your Economics Textbook at $10