1 Economic policy What does it mean for an allocation to be Pareto optimal? What does it mean for an allocation to be fair in the context of Pareto optimality? 2   Governments have a budget deficit if: Government expenditures are greater than tax revenue Consumption expenditures are greater than income Consumption expenditures are greater than tax revenue O Government expenditures are less than tax revenue

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A pareto optimal allocation is a feasible allocation which means an individual demands excatly the same mount of goods and services available in the economy. A pareto optimal allocation occurs at a point where slope of the indifference curves equals the slope of budget line that is ratio of prices which means this bundle is not only the affordable but also makes economic agents better off in terms of utility. It occurs at a point where it is not possible to make an economic agent better off without making others worse off. All the economic agents involved in trade has reached a point of maximum welfare at pareto optimal point.

A pareto optimal outcome is not necessarily a fair allocation because different individuals have different tastes and preferences. Suppose A,B and C are three economic agents,A and B starts with equal distribution of goods. As they have the different tastes, the might trade to reach their best allocation. Suppose A got the opportunity to trade with C and reached their pareto optimal outcomes . In this case, B will be envy of the allocation of A as they both started with the equality if allocation but A ended up with a better allocation as compared to B. So an allocation is said to be fair if no individual is envy of others allocation of goods that means allocation should be equitable and at the same time pareto optimal.

It can be concluded that only a pareto optimal allocation can't be fair as one of the two individuals involved in trade might be envy of others allocation.

Government have a budget deficit if -
Government expenditures are greater than the tax revenue.

Reason :

Government have budget deficit when the expenses of government is greater than the revenue. Budget deficit can be calculated as the difference between expenses and tax revenue. If the government have budget deficit ( Expenses - tax revenue > 0 ). The formula for calculating the budegt deficit is as follows.

Budget deficit = Expenses- Tax revenues

Budget deficit is not good for country as government has to borrow funds in case of budget deficit either internally or externally.