Vijay K. Mathur

Most intermediate microeconomics textbooks include a chapter on general
equilibrium and welfare economics. The main thrust of most textbooks in
such a chapter is twofold. First, the authors present a discussion to familiarize
students with the usual marginal conditions for efficiency in (1) the allocation
of two inputs in the production of two goods, (2) the distribution of those
goods among two consumers and (3) the output mix of those goods. Second,
most textbooks discuss how perfectly competitive markets, given the usual
assumptions about utility and production functions, assure the fulfillment of
those efficiency conditions.

A careful review of some textbooks reveals a great deal of ambiguity in the
discussion of the condition for efficient output mix. This article not only
points out the source of ambiguity but also suggests some clarifying additions
to textbook discussions and an explanation of the condition for efficient out-
put mix. The significance of efficient output mix is that, at that point, subjec-
tive common preferences of the society are in the balance with the technological
capabilities of the society for producing that mix. If the mix is not efficient, it
is then possible to make consumers better off by altering the output mix. The
suggested additions in this article may facilitate students' understanding of
the complicated concept of Pareto optimality and its significance in economic
decision-making.

Assume ordinal utility functions and strictly convex-to-the-origin indiffer-
ence curves of two individuals X and Y in the goods space of nuts (N) and ap-
ples (A). Further, assume a strictly concave-to-the-origin and continuous-
production-possibilities curve in N and A space. Then the output mix of N
and A is efficient when, where MRS and MRT,
respectively, represent marginal rate of substitution and marginal rate of
transformation. This condition simply means that each consumer's marginal
benefit of A in terms of N foregone is the same and their common marginal
benefit of A in terms of foregon N is equal to the marginal cost of producing
A in terms of N.

Vijay K. Mathur is a professor of economics at Cleveland State University. The author thanks
Edward Bell and Keehwan Park for their comments on an earlier draft of this paper and
Myong-Hun Chang and two referees of this journal for their insightful comments. He also ap-
preciates suggestions by William E. Becker, the editor of this journal.

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