Thus the standard argument from economics that we should rely on free markets plus wealth transfers: free markets ensure pareto optimal total production of goods, and wealth transfers allow that production to be distributed in such a way that nobody ends up worse off. That’s the theory, anyway.
Approaching this from a mechanism design standpoint, is there a way to distribute wealth such that this guarantee is actually enforced? It seems challenging!
It’s tough, at least if we want the mechanism to be fairly general.
Here’s an example of the kind of problem which comes up. We expect richer people to substitute from inferior to superior goods—e.g. as the populace becomes wealthier, they eat a bit less rice and a bit more chicken, or a bit less chicken and a bit more beef. So opening up trade creates a pareto improvement in the production frontier (e.g. holding everything else constant, we can always get more beef), but consumers may move to a new point on that frontier with different things produced.
So far, that’s not really a problem for mechanism design—all the goods are still traded on the market, presumably for money, so we can still use monetary income to tell whether someone is better/worse off. The real problem comes when people use extra wealth to substitute toward non-market goods—most notably leisure. If the populace becomes wealthier in real terms, they may decide to work less. But for mechanism design purposes, it’s really hard to separate that from new trade putting someone out of business.
Approaching this from a mechanism design standpoint, is there a way to distribute wealth such that this guarantee is actually enforced? It seems challenging!
It’s tough, at least if we want the mechanism to be fairly general.
Here’s an example of the kind of problem which comes up. We expect richer people to substitute from inferior to superior goods—e.g. as the populace becomes wealthier, they eat a bit less rice and a bit more chicken, or a bit less chicken and a bit more beef. So opening up trade creates a pareto improvement in the production frontier (e.g. holding everything else constant, we can always get more beef), but consumers may move to a new point on that frontier with different things produced.
So far, that’s not really a problem for mechanism design—all the goods are still traded on the market, presumably for money, so we can still use monetary income to tell whether someone is better/worse off. The real problem comes when people use extra wealth to substitute toward non-market goods—most notably leisure. If the populace becomes wealthier in real terms, they may decide to work less. But for mechanism design purposes, it’s really hard to separate that from new trade putting someone out of business.