Efficiency and Pareto Optimality
An economic system is efficient if the resource production and allocation maximizes the total payoff of all agents in the system. More generally, a system is efficient if the system state maximizes a desired performance metric (such as the total utility of all entities in the system) given the inputs to the system.
An economic system is Pareto-optimal if there does not exist alternative resource production and allocation that improves at least one agent’s payoff without reducing any agent’s payoff. More generally, a system is Pareto-optimal if there does not exist an alternative system state that makes at least one preference metric (such as some entity’s utility) better off without making any preference metric worse off.
The concept of Pareto efficiency is named after Vilfredo Pareto who was an Italian engineer and economist. He used the concept in his studies of economic efficiency and...
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