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Pareto optimality


Pareto efficiency or Pareto optimality, is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. The term is named after Vilfredo Pareto (1848–1923), Italian engineer and economist, who used the concept in his studies of economic efficiency and income distribution. The concept has applications in academic fields such as economics, engineering, and the life sciences.

Pareto improvement is defined to be a change to a different allocation that makes at least one individual better off without making any other individual worse off, given a certain initial allocation of goods among a set of individuals. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made.

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society. The notion of Pareto efficiency can also be applied to the selection of alternatives in engineering and similar fields. Each option is first assessed under multiple criteria and then a subset of options is identified with the property that no other option can categorically outperform any of its members.

Economic allocation in any system is not Pareto efficient when there is potential for a Pareto improvement—an increase in Pareto efficiency: when through reallocation, improvements can be made to at least one participant's well-being without reducing any other participant's well-being.

It is important to note, however, that a change from a generally inefficient economic allocation to an efficient one is not necessarily a Pareto improvement. Thus, in practice, to ensure that nobody is disadvantaged by a change aimed at achieving Pareto efficiency, compensation of one or more parties may be required. For instance, if a change in economic policy eliminates a monopoly and that market subsequently becomes competitive, the monopolist will be made worse off and still the gain in efficiency may be superior than the loss to the monopolist, so that the monopolist could hypothetically be compensated for its loss while still leaving a net gain for others in the economy, allowing for a Pareto improvement.


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