Next video:
Loading the player...

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

In a Pareto efficient scenario, it’s impossible to make one party’s situation better without harming another’s. Pareto efficiency has broad implications in economics, particularly in game theory. An economic state is Pareto efficient when all individuals are maximizing their utility.

On the production possibility frontier, Pareto efficiency occurs when goods and services are at their outermost points, indicating a level where production of one can’t increase without a reduction of the other.

Pareto efficiency has nothing to do with equality. In fact, Pareto efficiency can occur even when situations are unfair.

If three friends win a free pie at the local bakery, it’s Pareto efficient if they divide it into three equal slices and each eats one. It’s also Pareto efficient if they cut the pie into two equal slices and one of the friends is left out, because, even though it’s unfair, the third person doesn’t lose anything, and the whole pie is eaten.

Related Articles
  1. Retirement

    Estate Planning Basics

    Deciding what will happen to your assets when you pass away is a must - no matter how wealthy you are.
  2. Investing

    Key Factors to Consider When Picking Funds

    Choosing funds to invest in can be daunting due to the number of choices available. Consider these factors to narrow the choice.
  3. Insights

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  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. Investing

    Measuring Company Efficiency To Maximize Profits

    Efficiency ratios can provide indications of profitability, shows how efficiently a company is being managed, utilizes its assets and handles liabilities.
  6. Insights

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  7. 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.
Trading Center