Utility–possibility frontier

In welfare economics, a utility–possibility frontier (or utility possibilities curve), is a widely used concept analogous to the better-known production–possibility frontier. The graph shows the maximum amount of one person's utility given each level of utility attained by all others in society.[1] Points on the curve are, by definition, Pareto efficient, while points off the curve are not. However, based on the extent of society’s preferences for an equal distribution of real income, a point off the curve may be preferred. All points on or below the utility–possibility frontier are attainable by society; all points above it are not attainable. The utility–possibility frontier is derived from the contract curve[1].

The utility–possibility frontier (UPF) is the upper frontier of the utility possibilities set, which is the set of utility levels of agents possible for a given amount of output, and thus the utility levels possible in a given consumer Edgeworth box.

In a competitive economy, any allocation over the utility–possibility frontier is a Pareto optimum, as the UPF is a representation of the Pareto contract curve in a different dimension (utilities rather than goods). The UPF is the set of points which, for a given level of utility of person 1, utility of person 2 is maximized (subject to resource availability).[2] Because all points along the UPF represent different real income distributions, all being Pareto efficient, it is difficult to determine which utility combination is preferable to society. Usually, the social welfare function, which incorporates the deservedness of the two individuals and states how society’s well-being relates to that of the two individuals, is required to maximize social welfare.[3] It is assumed that the value of social welfare changes as the individual utility of any member of society changes. To maximize social welfare, a point on the UPF would be chosen that also falls on the highest indifference curve for society.

References
  1. Schotter. "Microeconomics" (PDF). University of Victoria. Retrieved 7 May 2011.
  2. Albouy, David. "Pareto Optimality and Public Goods with Two Agents" (PDF). University of California, Berkeley.
  3. Harsanyi, John (1987). The New Palgrave: A Dictionary of Economics. pp. 955–58.


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