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Pareto efficiency

A situation in which nobody can be made better off without making somebody else worse off. Named after Vilfredo Pareto (1843–1923), an Italian economist. If an economy’s resources are being used inefficiently, it ought to be possible to make somebody better off without anybody else becoming worse off. In reality, change often produces losers as well as winners. Pareto efficiency does not help judge whether this sort of change is economically good or bad.

Paris Club

The name given to the arrangements through which countries reschedule their official DEBT; that is, money borrowed from other governments rather than BANKS or private FIRMS. The club is based on Avenue Kléber in Paris. Its members are the 19 founders of the OECD as well as Russia. Other institutions such as the WORLD BANK attend in an ­informal role. Rescheduling requires the consensus agreement of members and must not favour one CREDITOR nation over another. Private debt re­scheduling takes place through the London Club.

Patents

In 1899 the commissioner of the American Office of Patents recommended that his office be abolished because “everything that can be invented has been invented”. The fact that there has been so much INNOVATION during the subsequent 100 years may owe something to the existence of patents. Economists reckon that if people are going to spend the time and MONEY needed to think up and develop new products, they need to be fairly confident that if the idea works they will earn a decent PROFIT. Patents help achieve this by granting the inventor a temporary MONOPOLY over the idea, to stop it being stolen by imitators who have not borne any of the development RISK and costs. Like any monopoly, patents create inefficiency because of the lack of COMPETITION to produce and sell the product. So economists debate how long patent protection should last. There is also debate about which sorts of innovation require the encouragement of a potential monopoly to make them happen. Furthermore, the pace of innovation in some industries has sharply reduced the number of years during which a patent is valuable. Some economists say that this shows that patents do not play a large part in the process of innovation.

Path dependence

History matters. Where you have been in the past determines where you are now and where you can go in future. Indeed, even small, apparently trivial, differences in the path you have taken can have huge consequences for where you are and can go. In ECONOMICS, path dependence refers to the way in which apparently insignificant events and choices can have huge consequences for the development of a market or an economy.

Economists disagree over how widespread path dependence is, and whether it is a form of MARKET FAILURE. One focus of this debate is the QWERTY keyboard. Some argue that the QWERTY design was deliberately made slow to use so as to overcome a jamming-at-speed problem in early typewriters. Much faster alternative layouts of keys have failed to prosper, even though the anti-jamming rationale for QWERTY has been defunct for years. Others say that the QWERTY system is as efficient a layout of keys as any other and that its success is a triumph of MARKET FORCES. Having invested in learning to make and use the QWERTY keyboard, it makes no economic sense to switch to an alternative that is no better than QWERTY.

Peak pricing

When CAPACITY is fixed and DEMAND varies during a time period, it may make sense to charge above-AVERAGE PRICES when demand peaks. Because this will divert some peak demand to cheaper off-peak periods, it will reduce the total amount of capacity needed at the peak and reduce the amount of capacity lying idle at off-peak times, thus resulting in a more efficient use of resources. Peak pricing is common in SERVICES with substantial fixed capacity, such as electricity supply and rail transport, as anybody who pays higher fares to travel during rush hours knows only too well.

Percentage point

A unit of size, a one-hundredth of the total. Not to be confused with percentage change. When something increases by 1 percentage point this may be quite different from a 1% increase. For instance, if GDP grew last year by 1% and this year by 2%, the GROWTH rate this year increased by 1 percentage point compared with last year (the difference between 1% and 2%) and also by 100% (2% is double 1%). A 1% increase would mean that the growth rate this year was only 1.01%.