ABSTRACT
This chapter examines the analytical consequences of introducing x-inefficiency into the Vilfredo Pareto Optimality welfare model. It is shown that if an economy is allocatively efficient and x-inefficient in competitive equilibrium, under reasonable conditions economic welfare can be increased for at least one individual without reducing the welfare of some other individual, at least in the long run. The conventional wisdom focuses on the efficient allocation of resources in production given relative factor prices. Adam Smith is considered to be the penultimate free marketeer, whose masterworks are viewed as benchmarks for an appreciation of the free market, for he is the dual author of both maximal wealth and economic justice. Arthur Cecil Pigou provides a much more specific discussion of economic welfare, and one can infer from his work what would be an optimal or best distribution of income or criteria for what may be referred to as Pigouvian Optimality.
