Definition

Pareto efficiency

Part of the Business terms glossary:

Pareto efficiency is a balance of resource distribution such that one individual’s lot cannot be improved without impairing the lot of one or more other individuals.

The concept of Pareto efficiency is based on the work of Vilfredo Pareto, an Italian economist of the late 19th and early 20th century, who is better known for the Pareto principle. The concept derives from Pareto's work on income distribution and  economic efficiency. In recent years, the principle has been applied to other areas of study including engineering, project management and the social sciences.

Within a given system, if one individual or other entity can be given a benefit without worsening the situation for any other individual or entity, doing so is known as a Pareto improvement. According to this concept, it is desirable to continue to make Pareto improvements until it is no longer possible to do so because a benefit to one individual would worsen the lot of one or more others. When no further Pareto improvements can be made, Pareto efficiency is said to have been reached. 

This was last updated in August 2013
Contributor(s): Ivy Wigmore
Posted by: Margaret Rouse

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