Italian Economist Vilfredo Pareto’s Lasting Contribution to Economic Theory GMAT Reading Comprehension

Reading Passage Question

Italian economist Vilfredo Pareto’s lasting contribution to economic theory is his notion of Pareto optimality. Pareto’s concept attempts to provide a theoretical understanding of the rather abstract concept of desirability. Pareto’s desirability criterion holds that the state of world X is better than world Y if no one is worse off in Y than X and at least one member of world X is better off in X. Movement from one state to the other is termed “Pareto-desirable.”

Pareto-desirability as a norm has three important characteristics. The Pareto-desirable state is a consequentialist theory because it evaluates the world based on the state of the world at some given time. All institutions, actions, and policies are judged to be desirable based on the effect such thing has on the world. Furthermore, Pareto desirable states are personal, in the sense that moral goodness is defined as some better state for some person (even if it is a single person, as long as everyone else is no worse off). Finally, goodness is defined in terms of a person’s particular preferences; an individual is better off when achieving more of his or her preferences.

Pareto-desirability overlaps somewhat with the philosophical theory of utilitarianism, which states that what is best is what causes the most people to be happy. Where Pareto-desirability breaks ranks, however, is in its ranking of the alternative worlds. Utilitarianism considers and ranks all possible worlds, good and bad, but the Pareto criterion ranks only those alternatives in which one’s preference satisfaction is higher. Thus, comparisons between situations in which some people are better off and some worse off are not possible with the Pareto system. Of course, Pareto desirability is not a practical tool for use in the real world. Economists mainly use the Pareto criterion when analyzing systems on a theoretical level.

“Italian economist Vilfredo Pareto’s lasting contribution to economic theory”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

1. It can be inferred from the passage that economist theorists

1. regard Pareto desirability as little more than an abstract tool
2. continue to use the concept of Pareto desirability
3. disagree with the philosophical theory of utilitarianism
4. believe that consequentialism is the most appropriate way to view economic policies
5. do not believe the concept of moral goodness is useful in economics

2. The author most probably stated “Of course, Pareto Desirability… world,” in order to emphasize that

1. it is not practical to evaluate only situations in which people are better off because in the real world someone is always worse off as the result of a policy
2. Pareto desirability has a limited use to economists and is only applicable when analyzing monetary systems
3. utilitarianism has more application to the real world because it considers all possible worlds
4. Pareto-desirability can only be used as a theoretical tool because no true alternative worlds exist
5. the Pareto criterion would be more useful if theorists could find a way to use it to compare situations in which some people are better off and some worse off

3. Which of the following statements provides the most logical continuation of the ideas expressed in the last paragraph of the passage?

1. When examining the way the world actually is, however, economists use utilitarianism.
2. Due to its considerable shortcomings, Pareto-desirability will likely diminish in importance in economic theory.
3. By examining the rules behind particular policies instead of the policies themselves, economists can determine the properties of the system that created them.
4. All three characteristics of Pareto-desirability are important to economists.
5. Until a more practical tool is developed, Pareto-desirability will continue to be economists’ prime way of understanding the world.

4. The primary purpose of the passage is to

1. argue for the elevation of utilitarianism over Pareto-desirability in economic theory
2. evaluate the usefulness of the Pareto criterion to practical problems in economics
3. provide examples of some ways that economists attempt to conceptualize abstract concepts
4. suggest a revision to the predominant mode of economic thinking is called for
5. summarize a number of important features of a prevailing economic idea

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