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.

  1. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies ...
  2. 80-20 Rule

    The 80-20 rule, a rule of thumb often applied to business, states ...
  3. Equity-Efficiency Tradeoff

    An economic situation in which there is a perceived tradeoff ...
  4. Efficiency Principle

    An economic theory that states that the greatest benefit to society ...
  5. Maurice Allais

    A French economist who won the 1988 Nobel Prize in Economics ...
  6. Neoclassical Growth Theory

    The neoclassical growth theory is an economic concept where equilibrium ...
Related Articles
  1. Investing

    Explaining Pareto Efficiency

    Pareto efficiency is an economic state where resources are allocated in the most efficient manner.
  2. Personal Finance

    The Pareto Principle And Savings

    Here's how you can implement the Pareto principle in your everyday life to improve your financial standing.
  3. Small Business

    Time Management Practices to Master Before Starting Your Own Business

    Learn how Pareto analysis, the ABC method, the Eisenhower method and the POSEC method can help small business owners effectively manage their time.
  4. Financial Advisor

    Why Young Investors Should Become Market Agnostic

    Too many inexperienced investors are reactive when it comes to their markets and investments, which can undermine financial goals.
  5. Insights

    4 Reasons Why Irrational Exuberance Lasts

    20 years ago, Alan Greenspan gave his famous "irrational exuberance" speech, but asset bubbles take a long time to pop.
  6. Investing

    What Is Tactical Asset Allocation?

    Here's how tactical asset allocation, an extension of strategic asset allocation, works.
  7. Investing

    Strategic Asset Allocation to Rebalance Portfolios

    This involves setting allocations for various asset classes, then yearly rebalancing the portfolio when it deviates from the initial settings.
  1. How do property rights affect externalities and market failure?

    Most economic externalities can be efficiently solved through a system of private property rights, where costs and benefits ... Read Answer >>
  2. How can I use asset allocation to properly diversify my portfolio?

    Understand how asset allocation works, and learn how you can use asset allocation to diversify your investment portfolio ... Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center