Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A factory emits pollution, affecting nearby residents' health, while the factory maximizes its profits.
B
A company invests in renewable energy, reducing its carbon footprint while increasing its profits.
C
A farmer uses sustainable practices that benefit the environment and his crop yield.
D
An individual receives a promotion at work, leading to higher productivity for the entire team.
Understanding the Answer
Let's break down why this is correct
Answer
Pareto efficiency happens when resources are allocated in a way that no one can be made better off without making someone else worse off. An example of a situation where this is not achieved is when a factory pollutes the air while producing goods. The factory benefits from lower costs and higher profits, but the nearby residents suffer from health problems due to the pollution, making them worse off. Here, the factory's actions create negative externalities, meaning the costs of pollution are not reflected in the factory's decision-making. Because of these external effects, the situation is not Pareto efficient, as the well-being of the residents is affected without any compensation or consideration for their suffering.
Detailed Explanation
In this case, the factory makes money but harms the health of nearby people. Other options are incorrect because This option suggests that doing good for the environment while making money is bad; Here, the farmer is using methods that help both his crops and the environment.
Key Concepts
Pareto efficiency
externalities
Topic
Optimal and Sub-optimal Outcomes
Difficulty
medium level question
Cognitive Level
understand
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