Pareto Efficiency

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DEFINITION of 'Pareto Efficiency'

An economic state where resources are allocated in the most efficient manner. Pareto efficiency is obtained when a distribution strategy exists where one party's situation cannot be improved without making another party's situation worse. Pareto efficiency does not imply equality or fairness.

Also known as "Pareto optimality."

BREAKING DOWN 'Pareto Efficiency'

Pareto efficiency has broad implications in economics, particularly in game theory. Unlike the predicted logical outcome of a prisoner's dilemma (participants choose selfishly and do not achieve the best possible outcome), if an economic state is Pareto efficient, individuals are maximizing their utility. The final allocation decision cannot be improved upon, given a limited amount of resources, without causing harm to one of the participants.

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