Pareto Efficiency

Posted in Finance, Accounting and Economics Terms, Total Reads: 889

Definition: Pareto Efficiency

It’s an economic state where resources are allocated in the most optimal and efficient manner. It is a state of allocation of resources in which it is impossible to make one party better off without making at least another party worse off.

It is also known as Pareto Improvement and was coined by Italian economist Vilfredo Pareto. This economic theory does not take into account equality and fairness principles. Also a Pareto Improvement may not lead to a satisfactory outcome.

Eg: Suppose government plans to build a new airport which leads to a greater improvement to the society as compared to the social costs involved. However this causes noise pollution and problems for people living near the airport. So if these people are properly compensated then it’s a Pareto Improvement.


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