Pareto Improvement

What is a 'Pareto Improvement'

Under the rubric of neoclassical economic theory, a Pareto improvement occurs when a change in allocation harms no one and helps at least one person, given an initial allocation of goods for a set of persons. The theory suggests that Pareto improvements will keep enhancing value to an economy until it achieves a Pareto equilibrium, where no more Pareto improvements can be made.

BREAKING DOWN 'Pareto Improvement'

Named after Vilfredo Pareto (1848-1923), and Italian economist and political scientist also renowned for the Pareto Principle, a Pareto improvement in a macro sense is an action that leads to an economic benefit without making someone worse off. Given an initial allocation of goods or resources for a set of individuals, if a change in resources benefits at least one person while harming no one else, a Pareto improvement has been made. These improvements can continue to a point where the allocation is Pareto efficient - that is, when no more changes can be made to the allocation without making someone worse off.

Pareto in Practice

Aside from applications in economics, the concept of Pareto improvements can be found in the fields of life sciences and engineering - in any academic discipline where trade-offs are simulated and studied to determine the number and type of reallocation of resource variables necessary to achieve Pareto equilibrium. In the business world, factory managers may run Pareto improvement trials in which, for example, they reallocate labor resources to try to boost productivity of assembly workers without decreasing productivity of the packing and shipping workers.

Pareto Critique

Pareto improvements, along with Pareto efficiency, are criticized in the realm of political economy because they do not address issues of welfare among different groups of people. Pareto improvements inform only steps to reach an efficient state, not necessarily an 'equitable' one that decision-makers in a democratic political economy strive to move society toward. If the wealthy class of a society is made better off without hurting the poor through a reallocation of a resource, then a Pareto improvement has been made. However, the economic status of the poor did not get better.