Pareto's Neoclassical Economic Model

The neoclassical economic model gives an exceptionally fulfilling clarification of why parties are willing to join hands and enter into a contracts. Parties enter into contracts with their own free will without any coercion. Hence each party will enter into a contract only if its anticipated benefits are greater than the expected costs.

For example assume that a house owner offers to pay a painter $5,000 to paint her home. The house owner must expect the value of the benefits she receives from getting her house painted is at least equal to or greater than the $5000 cost which she will endure if the painter accepts the offer.Similarly if the painter accepts the proposal, then he must expect that the $5000 benefit he will receive after painting the job will exceed the cost (number of labor hours and cost of …show more content…
When a party breaches the contract the most common and efficient type of remedy used is the suit for damages, where unliquidated damages are paid to the harmed party. Now the key issue here arises is what should be the efficient amount of damages? A very high payment of damages for breach will ensure compliance under all circumstances, but will not be Pareto efficient. However, measure of expectation damages, where damages are equal to the amount of loss faced by the party that is a victim of breach is a more efficient approach.For instance if buyer and seller agree on an efficient exchange of desk for $1000 and a Pareto efficient complete contract is formed, the contract will than specify that performance will only take place if and only if the production cost is less than $1000. In this scenario an expected measure of damages of $1000 will cause the seller to behave in a Pareto efficient manner, because if the production cost is greater than $1000 the seller will no longer produce the desk and will pay the damages but will produce the desk as long a production cost is less than or equal to $ 1000 (amount for