4-19-2012Lecture 3:2I. Evaluating Outcomes: Pareto CriterionA. Pareto ImprovementB. Pareto InefficientC. Pareto EfficientII. Uncertainty about OutcomesA. Nature nodesB. Probabilities sum to oneC. Expected valueI. Pareto is objective; while it is limited, most agree on this evaluation.RF Not RF Not RF Not(5, 2) (5, 0) (0, 5) (7, 0) Pareto Improvement: (5, 0) to (7, 0) Aid Not(0, 0) Edu Limos(2, 2) (-2, 5) (2, 2) and (-2, 5): Pareto Efficient Pareto Improvement: (0, 0) to (2, 2) Rollback Equilibrium: rich: Not poor: Limos if AidRichPoorChal ChalInc- Pareto Improvement: compare 2 possible outcomeso ex. Situation A is a Pareto Improvement over Situation B if at least one person is better with A and no person is worse off. includes possibility that all are better offSo how can we change players' actions to get to the Pareto Improvement?- Pareto Inefficient & Pareto Efficient: apply to a single outcome- If there is a Pareto Improvement over Situation C, then C is Pareto Inefficient.- Pareto Inefficient: should not cause conflicts and everyone is better off.o we're just prisoners of our choices and the order of things- Pareto Inefficient sounds good but there is an improvement and you haven't changed youractions to get there.o Bawn's traffic example of trying to turn left on Barrington Pareto Efficient: Mr. Eastbound lets her go, he's stopped Pareto Inefficient: Mr. Eastbound stopped, Bawn stopped- outcome of self-interest / rational choices sometimes leads to Pareto Inefficient. - Pareto Efficient: complicated- If there is no Pareto Improvement possible, then the situation is Pareto Efficient.o minimal good thing. minimal situation.o it's a weak, toothless "good" thing- It is critical to know the sets of outcomes especially in Pareto Efficient.- To declare something to get Pareto Efficient, you have to go over each outcome- Pareto Improvement is separate from Pareto Inefficient and Pareto Efficient.- It is possible to have all Pareto Efficient.o all others hurt at least one player Synonyms o Pareto Improvement: A Pareto dominates B B is Pareto dominated by Ao Pareto Inefficient: Pareto Inferioro Pareto Efficient: Pareto