(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 631

606 PART 4 • Information, Market Failure, and the Role of Government
tangent to indifference curve U 1K. This allocation would leave Karen no worse
off than she was at A and James much better off. And because no further trade
is possible, D is an efficient allocation. Thus C and D are both efficient allocations, although James prefers D to C and Karen C to D. In general, it is difficult
to predict the allocation that will be reached in a bargain because the end result
depends on the bargaining abilities of the people involved.

The Contract Curve

• contract curve Curve
showing all efficient allocations
of goods between two
consumers, or of two inputs
between two production
functions.

We have seen that from an initial allocation many possible efficient allocations
can be reached through mutually beneficial trade. To find all possible efficient allocations of food and clothing between Karen and James, we look for all points of
tangency between each of their indifference curves. Figure 16.6 shows the contract
curve: the curve drawn through all such efficient allocations.
The contract curve shows all allocations from which no mutually beneficial
trade can be made. These allocations are efficient because there is no way to reallocate
goods to make someone better off without making someone else worse off. In Figure 16.5
three allocations labeled E, F, and G are Pareto efficient, although each involves
a different distribution of food and clothing, because one person could not be
made better off without making someone else worse off.
Several properties of the contract curve may help us understand the concept
of efficiency in exchange. Once a point on a contract curve, such as E, has been
chosen, there is no way to move to another point on the contract curve, say F,
without making one person worse off (in this case, Karen). Karen is worse off
because she has less food and less clothing at F than she had at E. Without making further comparison between James’s and Karen’s preferences, we cannot

Karen’s Food

OK

G
Contract
Curve

James’s
Clothing

F

Karen’s
Clothing

E

OJ

James’s Food

F IGURE 16.6

THE CONTRACT CURVE
The contract curve contains all allocations for which consumers’ indifference curves are
tangent. Every point on the curve is efficient because one person cannot be made better
off without making the other person worse off.