Editing Liberal paradox (section)

===Universal domain===
Julian Blau proves that Sen's paradox can only arise when individuals have "nosy" preferences—that is when their preference depends not only on their own action but also on others' actions.<ref name="Blau">{{cite journal|last=Blau|first=Julian|title=Liberal Values and Independence|journal=The Review of Economic Studies|year=1975|volume=42|number=3|pages=395–401 |doi=10.2307/2296852 |jstor=2296852}}</ref> In the example of Alice and Bob above, Alice has a preference over how Bob paints his house, and Bob has a preference over Alice's house color as well.

Most arguments which demonstrate market efficiency assume that individuals care about only their own consumption and not others' consumption and therefore do not consider the situations that give rise to Sen's paradox. In fact, this shows a strong relationship between Sen's paradox and the well known result that [[Market failure|markets fail]] to produce Pareto outcomes in the presence of [[externalities]].<ref name="Laffont">[[Jean-Jacques Laffont|Laffont, J. J.]] (2008). "externalities," ''[[The New Palgrave Dictionary of Economics]]'', 2nd Ed. [http://www.dictionaryofeconomics.com/article?id=pde2008_E000200&q=externality&topicid=&result_number=9 Abstract.]</ref> Externalities arise when the choices of one party affect another.  Classic examples of externalities include [[pollution]] or [[overfishing]]. Because of their nosy preferences, Alice's choice imposes a negative externality on Bob and vice versa.

To prevent the paradox, Sen suggests that "The ultimate guarantee for individual liberty may rest not on rules for social choice but on developing individual values that respect each other's personal choices."<ref name="SenJPE" /> Doing so would amount to limiting certain types of nosy preferences, or alternatively restricting the application of the Pareto principle only to those situations where individuals fail to have nosy preferences.

Note that if we consider the case of cardinal preferences—for instance, if Alice and Bob both had to state, within certain bounds, how much happiness they would get for each color of each house separately, and the situation which produced the most happiness were chosen—a minimally-liberal solution does not require that they have no nosiness at all, but just that the sum of all "nosy" preferences about one house's color are below some threshold, while the "non-nosy" preferences are all above that threshold. Since there are generally some questions for which this will be true—Sen's classic example is an individual's choice of whether to sleep on their back or their side—the goal of combining minimal liberalism with Pareto efficiency, while impossible to guarantee in all theoretical cases, may not in practice be impossible to obtain.