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Pareto Efficiency

Candlefocus Editor
The concept of Pareto efficiency was developed by the Italian economist Vilfredo Pareto in the late nineteenth century. Pareto posited that any change must make at least one individual worse off in order for it to be deemed beneficial for the economy as a whole. The concept of Pareto efficiency thus refers to economic efficiency when all of the available resources are allocated in such a way that no one can be made better off without someone else being made worse off.

In practical terms, achieving Pareto efficiency is difficult and unlikely. As a result, several other criteria of economic efficiency have been suggested, such as Kaldor-Hicks efficiency, which allows a certain amount of changes to be made without leaving anyone worse off. This form of efficiency is used to inform economic policy and to decide whether a certain change will bring an overall benefit to the economy or if it must be reversed.

Kaldor-Hicks efficiency is based on Pareto efficiency, but it has been critiqued because it can lead to decisions in which the individuals who benefit from it are compensated but this compensation does not necessarily go to those who are made worse off by the new policy.

In conclusion, Pareto efficiency is a concept proposed by Vilfredo Pareto in the late nineteenth century, which explains the need for changes to benefit the economy as a whole by making at least one person worse off. While achieving Pareto efficiency is impossible, several other economic efficiency criteria such as Kaldor-Hicks efficiency have been proposed as ways to inform economic policy. However, these criteria have been critiqued for potentially leading to decisions that benefit some as much as they harm others.

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