Pareto Optimality and the Law

OVER the past few years it has been generally recognized that the nature of any optimal solution depends, for two quite different reasons, on the existing distribution of income [10]. Inasmuch as the distribution of in-come is itself influenced by legislation—through taxes and subsidies, through price regulation and controls, and through a vast and growing public expenditure on goods and services—the optimal solutions attainable must depend also upon the laws of a country. In a modern economy in which external effects are rapidly spreading, the influence of the law both on the determination and the attainment of optimal solutions, makes itself felt in yet other ways. In cases of conflicting interest, according as the law, deliberately or by default, places the burden of reaching optimal arrange-ments on one party or group rather than on the other, both the characteris-tics of the optimal outcome and the costs of its attainment are altered. And the more important, as a component of welfare, are the external effects in question the greater, in these respects, is the impact of the law.