Pareto Efficiency

Pareto Efficiency (or Pareto optimality) is a state of allocation in which no individual can be made better off without making at least one individual worse off. Named after Vilfredo Pareto, the concept is the foundational criterion of welfare economics and the endpoint of the first welfare theorem.

But Pareto efficiency is morally silent: a distribution where one person owns everything and everyone else starves is Pareto efficient if taking anything from the owner makes them worse off. The concept has been criticized for entrenching status quo distributions and for being too weak to guide policy in a world where almost every meaningful change creates winners and losers. The economist's response — that we need a separate theory of distribution — concedes the point while refusing to solve it. The systems theorist's response is sharper: Pareto efficiency is not a property of real systems but a property of formal systems that have already assumed away the conflicts that make distribution necessary. Kaldor-Hicks efficiency attempts to repair this silence by allowing compensation, but the compensation is hypothetical and rarely paid.