Abstract
Few concepts are more widely used within economics than that of ‘efficiency’. It usually means not wasteful, or doing the ‘best’ one can with available resources. However, there are specialized usages; for example, the concept of efficient markets in the finance literature, or Leibenstein’s concept of X-inefficiency. Not all these meanings, even in academic work, have a common provenance. However, the concept as used in neoclassical economics has a precise but rather narrower meaning, given to it by Pareto, the Italian economist and sociologist, in his works Course in Political Economy and Manual of Political Economy around the turn of the twentieth century. He suggested the following definition: an allocation of resources in the economy was optimal if there existed no other productively feasible allocation which made all individuals in the economy at least as well-off, and at least one strictly better off, than they were initially. Although Pareto actually used the word ‘optimal’, this is really a definition of efficiency, as a Pareto-‘optimal’ allocation of resources is ‘good’ only in the limited sense that not everybody can be made better off. It may in fact be very undesirable in some other way, for example, very unequal. It is not surprising, therefore, that the word ‘Pareto-optimal’ has gradually been replaced by ‘Pareto-efficient’.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Bibliography
Arrow, K.J. 1963. Uncertainty and the welfare economics of medical care. American Economic Review 53: 941–973.
Debreu, G. 1959. The theory of value. New York: Wiley.
Drèze, J., and N. Stern. 1987. The theory of cost–benefit analysis. In Handbook of public economics, ed. A. Auerbach and M. Feldstein, vol. 2. Amsterdam: North-Holland.
Gale, D. 1982. Money: In equilibrium. Cambridge: Cambridge University Press.
Hart, O. 1975. On the optimality of equilibrium when the market structure is incomplete. Journal of Economic Theory 11: 418–443.
Hart, O. 1983. The market mechanism as an incentive scheme. Bell Journal of Economics 14: 366–382.
Heal, G. 1986. Planning. In Handbook of mathematical economics, ed. K. Arrow and M. Intriligator, vol. 3. Amsterdam: North Holland.
Lange, O. 1936. On the economic theory of socialism, part 1. Review of Economic Studies 4 (1): 53–71.
Leibenstein, H. 1966. Allocative efficiency v. X-efficiency. American Economic Review 56: 392–415.
Lipsey, R.G., and K. Lancaster. 1956. The general theory of second best. Review of Economic Studies 24: 11–32.
Mirrlees, J. 1986. The theory of optimal taxation. In Handbook of mathematical economics, ed. K. Arrow and M. Intriligator, vol. 3. Amsterdam: North-Holland.
Pareto, V. 1927. Manual of political economy, 1971. London: Macmillan.
Rowthorn, B. 1980. Neo-classicism, neo-Ricardianism, and Marxism. In Capitalism, conflict and inflation, ed. B. Rowthorn. London: Lawrence & Wishart.
Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. London: Allen & Unwin.
von Hayek, F.A. 1940. Socialist calculation; The competitive solution. Economica 7: 125–149.
Author information
Authors and Affiliations
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Lockwood, B. (2018). Pareto Efficiency. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_1823
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_1823
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences