Pareto Efficiency
Definition
It’s when one party’s situation cannot be
improved without making another party’s
situation worse
Doesn’t necessarily imply equality or fairness
Pareto improvement
When there is a change in allocation of
resources where one person becomes better
off, but it doesn’t make anybody else worse
off
Example
Three people have 10 apples; one person
gets one more apple, but it doesn’t come at
the expense of one of the other three
people’s apples
This is a Pareto improvement
Another example…
Seller values car at $10,000. Buyer is willing
to pay $15,000 for it. At any sale price
between $10,000 and $15,000 we are Pareto
efficient. Both are better off for the trade.
Efficiency
Pareto efficiency comes when no other
improvements to efficiency can happen
without a loss to others; can’t make
someone better off without making someone
else worse off
Different from game theory
Unlike when each person chooses selfishly
and don’t achieve best outcome; pareto
efficiency ends with individuals maximizing
their utility