Pareto efficiency

Pareto order dominated

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Pareto order not dominated

Pareto Efficiency, also known as Pareto Optimality, is a concept in economics that measures the efficiency of the distribution of resources within a society. The principle is named after Vilfredo Pareto, an Italian economist who first introduced the concept in his work at the end of the 19th and the beginning of the 20th centuries. Pareto Efficiency occurs when a distribution strategy exists where one party's situation cannot be improved without making another party's situation worse. This concept is a fundamental criterion in the field of welfare economics, game theory, and engineering.

Definition

In more technical terms, a state of allocation of resources is Pareto Efficient if there is no alternative allocation where at least one individual can be made better off without making someone else worse off. This concept is crucial in understanding the trade-offs in economic policy and resource distribution, highlighting the potential conflicts between efficiency and equity within an economy.

Application

Pareto Efficiency has applications across various disciplines:

• In welfare economics, it is used to evaluate the economic efficiency of different market structures and the impacts of public policy.
• In game theory, Pareto Efficiency helps in analyzing strategies that will lead to optimal outcomes for all players involved.
• In engineering and operations research, it is applied in optimization problems to find the most efficient solutions that balance multiple objectives.

Criticism

Despite its widespread use, Pareto Efficiency has faced criticism. Critics argue that it does not necessarily lead to a socially or morally desirable distribution of resources. Since Pareto Efficiency only considers improvements that do not harm others, it may ignore inequalities or unfair distributions that are Pareto Efficient but not equitable.

Examples

An example of Pareto Efficiency is a scenario where any reallocation of resources to make one person better off would result in making someone else worse off. For instance, in a two-person economy where one person can only be made richer by taking away from the other, the allocation is Pareto Efficient if no further improvements can be made without harming the other.

See Also

• Welfare Economics
• Game Theory
• Social Choice Theory
• Optimization (mathematics)