By definition, economic "goods" are scarce. It is the scarcity of a market good, not its usefulness, that determines its price. (Remember the diamonds vs. water paradox: water is essential for life, but plentiful and thus cheap; diamonds have very limited usefulness, but are scarce and thus expensive.)

Many economic goods are not market goods. Clean air or water, safety and health are examples of non-market goods that have economic values but lack markets that reveal those values as prices. Conversely, economic "bads" such as crime and pollution are in excess supply.

We identify three main resource management objectives: efficiency, equity and sustainability. The major focus of this course is the positive analysis of allocative efficiency:

• Under what conditions do markets allocate resources to their highest-valued uses at the most appropriate times?
• Under what conditions do markets fail to achieve theese efficient resource allocations?
• What is the best way to correct these allocative inefficiencies?

One common criterion of economic efficiency was defined by the economist Vilfredo Pareto: a distribution of resources among individuals is efficient as long as no one can be made better off without someone else being made worse off.

The Edgeworth Box diagram illustrates this concept.  Suppose the finite axes of the box represent fixed quantities of two goods, X and Y, to be allocated between two individuals, A and B. We can plot A's indifference curves as radiating northeastward from her origin at the lower left, and plot B's indifference curves as radiating southwestward from his origin at the upper right (B gets the units of X and Y that A doesn't get). If A and B can trade freely, they will trade toward some point along the green line ("contract curve"), which is the set of all points where their indifference curves are tangent and their marginal rates of substitution between X and Y (the slopes of the indifference curves) are equal.

Note that the Pareto-efficiency criterion does not address issues of equity (fairness) in how the resources are initially distributed between A and B; neither does it dictate how the two parties should divide the economic surplus generated from economic exchange.   For example, an allocation where A gets everything and B gets nothing would be Pareto-efficient.  The endpoints of the green contract curve at the origins for A and B are both Pareto-efficient.

A logical extension of the Pareto-efficiency concept is that any redistribution of resources among individuals is efficient only if the gainers from the redistribution can fully compensate the losers and still be better off.

Equity or fairness issues fall in the realm of normative economics, which deals with analyses of "what should be," and involve subjective ethical judgments. Economists certainly don't claim special expertise in ethics, but they can often predict the efficiency consequences of policies the purport to improve social equity.

In one of the upcoming assignments in this course, you will examine the general statistical relationship between varying levels of income inequality in a large sample of national economies versus their rates of GDP growth. Do economies with more equal household incomes and large middle classes grow faster than countries with more super-rich households and more poverty? If so, then public expenditures to alleviate poverty, financed by taxes on the wealthy, may be Pareto-efficient.