Optimality for the economy

In this chapter we illustrate the facile and once standard demonstration that a Pareto optimal position for the economy is identified (geometrically) by a point of tangency of the price line with the transformation curve. Such a point is Q₂ on the transformation curve of Figure 31 since the price line p₂ is tangent at Q₂. A suboptimal, or nonoptimal position, in contrast, is identified by a point at which the price line intersects the transformation curve. Such a suboptimal position is shown at Q₁ in Figure 31. (Notice, however, that Q₁ is a point along the transformation curve, so that it is productively efficient in that more of one good cannot be produced without giving up some of the other good. An interior point such as Q₀ inside the transformation curve is clearly one of productive inefficiency: a movement from Q₀ to some points along the transformation curve results in more of both goods being produced.)