Discuss the basic difference in approach adopted by Pigou and Pareto to deal with problems of welfare economics.

Let’s now go to the essentials. In his analysis of consumer choices. Pareto picks up Edgeworth’s indifference curves and uses them to determine the optimal point. For a given set of prices (p1 and p2), you can define the budget line as the locus that represents the quantities of goods that the consumer can buy with a given budget. It is then a line of slope -p1 / p2. The optimum is obtained at the highest utility level, that is, when the budget line is tangent to the indifference curve u1 on the graph. At point S we have:

Thus, with new analysis instruments, the traditional condition of the consumer’s optimum is recovered: the equality of weighted marginal profits.

But, in effect, it is about more than proposing new habits (indifference curves) for old theories (the consumer’s optimum). In effect, we no longer have to define a cardinal utility function to determine the optimum. It is sufficient to establish a preference relation on the set of “baskets” of goods, that is, to establish ordinal comparisons. Consequently, utility levels can be represented by any arbitrarily increasing function that Pareto calls index. This function will of course be a utility function, and all we ask of it is that it reflects a relation of order. Technically, it is an ordinal function defined by a non-decreasing monotonic transformation.