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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.

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