Pareto efficiency

Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off.^[1] The concept is named after Vilfredo Pareto (1848–1923), Italian civil engineer and economist, who used the concept in his studies of economic efficiency and income distribution. The following three concepts are closely related:

Given an initial situation, a Pareto improvement is a new situation where some agents will gain, and no agents will lose.
A situation is called Pareto-dominated or Pareto-inefficient if there is some possible Pareto improvement that has not been made.
A situation is called Pareto-optimal or Pareto-efficient if no change could lead to improved satisfaction for some agent without some other agent losing or, equivalently, if there is no scope for further Pareto improvement (in other words, the situation is not Pareto-dominated).

The Pareto front (also called Pareto frontier or Pareto set) is the set of all Pareto-efficient situations.^[2]

Pareto originally used the word "optimal" for the concept, but as it describes a situation where a limited number of people will be made better off under finite resources, and it does not take equality or social well-being into account, it is in effect a definition of and better captured by "efficiency".^[3]

In addition to the context of efficiency in allocation, the concept of Pareto efficiency also arises in the context of efficiency in production vs. x-inefficiency: a set of outputs of goods is Pareto-efficient if there is no feasible re-allocation of productive inputs such that output of one product increases while the outputs of all other goods either increase or remain the same.^[4]

Pareto efficiency is measured along the production possibility frontier (PPF), which is a graphical representation of all the possible options of output for two products that can be produced using all factors of production.

Besides economics, the notion of Pareto efficiency has been applied to the selection of alternatives in engineering and biology. Each option is first assessed, under multiple criteria, and then a subset of options is ostensibly identified with the property that no other option can categorically outperform the specified option. It is a statement of impossibility of improving one variable without harming other variables in the subject of multi-objective optimization (also termed Pareto optimization).

^ "Martin J. Osborne". economics.utoronto.ca. Retrieved December 10, 2022.
^ proximedia. "Pareto Front". www.cenaero.be. Archived from the original on February 26, 2020. Retrieved October 8, 2018.
^ Lockwood, B. (2008). The New Palgrave Dictionary of Economics (2nd ed.). London: Palgrave Macmillan. ISBN 978-1-349-95121-5.
^ Black, J. D., Hashimzade, N., Myles, G. (eds.), A Dictionary of Economics, 5th ed. (Oxford: Oxford University Press, 2017), p. 459.

[1] "Martin J. Osborne". economics.utoronto.ca. Retrieved December 10, 2022.

[2] roximedia. "Pareto Front". www.cenaero.be. Archived from the original on February 26, 2020. Retrieved October 8, 2018.

[Palgrave_Macmillan-3] Lockwood, B. (2008). The New Palgrave Dictionary of Economics (2nd ed.). London: Palgrave Macmillan. ISBN 978-1-349-95121-5.

[4] Black, J. D., Hashimzade, N., Myles, G. (eds.), A Dictionary of Economics, 5th ed. (Oxford: Oxford University Press, 2017), p. 459.

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