Pareto efficiency

Multi-criteria optimization, or multiobjective optimization is a way of solving a mathematical or economic problem where many different parameters need to be changed to get one of the best possible solutions to the problem. The result of this is called Pareto efficiency, named after Vilfredo Pareto, who first used it in his studies. 

In welfare economics, the idea of Pareto efficiency is very simple: If there is no way of improving the situation of one person, without making that of another person worse, the solution found is Pareto-efficient. 

If we look at what the economy produces, we might say it is on its Pareto Frontier or Production Possibility Frontier, meaning that it is making (or "producing") all it can with the things it has (such as machines, labour, land and ideas -- all called resources or factors of production). If this is the case, making more of one thing would mean making less of another; the resources are already being used to full capacity, so making more of one thing will take resources away from making another.

Just because something is Pareto efficient, it doesn't mean it is fair or "equitable". Even though no-one could be made better off without making someone else worse off, it is possible that one person owns all of the world's things. To make anyone else better off, some would have to be taken away from this person, making them worse off.

Category:Welfare economics