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Pareto optimality

  A situation in which it is impossible to make some people better off without making others worse off. This criterion of \'economic efficiency\' was devised by the economist and sociologist V.F.D. Pareto, and is an important element in neo-classical economics. The Pareto criterion may be applied to efficiency of resource allocation, optimality being achieved when it is impossible to reallocate resources to produce an outcome that would increase the satisfaction of some people without reducing the satisfaction of others. A more direct application to distributional issues would be to recognize as Pareto optimal a distribution of income that cannot be changed in favour of one individual or group without taking some income from another individual or group.

The attainment of Pareto optimality is illustrated in the figure. Resources are available to generate a certain amount of income, which may be distributed among A and B — these could be individuals, groups of people or even the inhabitants of two different territories. The line AB indicates the possible distributions of the maximum total income available, ranging from all going to A and none to B (at point A) to all going to B (at B). Point X is a position of Pareto optimality, where any redistribution in the direction of either A or B (along the line) will make the other party worse off. In fact, any starting position on the line is Pareto-optimal. It would be impossible to increase A\'s share from X to Z (thus leaving B in the same position) because this conflicts with the resource constraint. However, point Y inside the triangle ABO is suboptimal by the Pareto criterion because available resources are not fully utilized and it is possible to increase A\'s income to X, for example, without taking anything away from B. Such a move would be a \'Pareto improvement\'.

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Parento optimality

The Pareto criterion figures prominently in traditional welfare economics, where it is argued that acceptance of Pareto optimality as a rule for allocative efficiency or distributive equity involves minimal ethical content. However, adoption of the Pareto criterion carries some important implications that tend to strengthen the status quo. Once society has reached the limit of production possibilities, i.e. there is no more growth, then the poor cannot be made better off without conflicting with the Pareto criterion, for any such move would be at the expense of others (the rich). Thus however badly off the poor may be, they can be made better off only if more income (or whatever) is produced. In practice, the application of the Pareto criterion in a no-growth economy would prevent redistribution in the direction of the poor, no matter how unequal the existing distribution. (Cf. welfare geography.) (DMS)



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