Economics Online Statistics Home Definitions Videos Quizzes Questions

Pareto efficiency

News


Gender pay gap

80% of UK companies and public sectors organisations pay women less than men.

Read more

Pareto efficiency - definition

Pareto efficiency means that an economy is making the best use of its scarce resources by employing all its resources to make goods and services in the least-cost way. 

A specific combination of scarce resources is said to be 'Pareto efficient' (or 'Pareto optimal') if it is impossible to make an individual or group of individuals 'better off' without reallocating resources from other individuals or groups thereby making them worse off. A combination of scarce resources is said to be 'Pareto inefficient' if it is possible to make someone better off without making someone else worse off.

For example, if a football stadium is full up, with no spare seats, the use of the stadium would be Pareto efficient or optimal. In this case, the only way to allow another spectator into the stadium to watch the match (or game) is to remove an existing spectator, and allocate their seat to the new spectator. Conversely, the stadium is used inefficiently when there are still spare seats.

Pareto efficiency can be explained using production possibility frontiers (PPFs). Operating on the edge of a PPF is considered to be Pareto efficient, given that trying to increase the output of one good must mean the sacrifice of another good.

Pareto efficiency



In the above diagram, both A and B are Pareto efficient - it is not possible to increase K, by moving from point B to point A, without losing a quantity of C (C1 to C2). However, point X is Pareto inefficient because it is possible to increase K goods (and move from X to A), and increase C goods at the same time. Hence, any point inside a PPF is Pareto inefficient.


WTO rules

What exactly is the 'most favoured nation' rule?

Read more
Read more
Model agencies collude to fix rates

Regulators find leading model agencies guilty of price fixing.

Read more
Read more
Read more
Read more
Customs unions

Costs and benefits of customs unions.

Read more
New materials

Multiple choice papers for Paper Three.

Read more
Savings ratio

Savings ratio falls to lowest level on record.

Read more