Paternalism and probabilities. The Pareto efficiency and optimality criteria rest on a number of value judgements including non-paternalism: individuals are the best judges of their own welfare. If...

Paternalism and probabilities. The Pareto efficiency and optimality criteria rest on a number of value judgements including non-paternalism: individuals are the best judges of their own welfare. If individuals are expected utility maximizers, both their utility functions and their probability beliefs must be respected. (a) Is the value judgement less reasonable for probabilities than for utility functions? (b) Suppose that in the two-person optimality problem both individuals had the same but mistaken probability beliefs and that the planner knows the true state probabilities. How would the optimal allocation differ if the planner used the correct probability beliefs to calculate the expected utilities rather than respecting the mistaken beliefs of the two individuals? (c) How would it differ if only one of them had mistaken beliefs?