Pareto efficiency
Invezz is an independent platform with the goal of helping users achieve financial freedom. In order to fund our work, we partner with advertisers who compensate us for users that Invezz refers to their services. While our reviews and assessments of each product on the site are independent and unbiased, brands may pay to appear higher up our table rankings or place ads in specific areas of the site. The order in which products and services appear on Invezz does not represent an endorsement from us, and please be aware that there may be other platforms available to you than the products and services that appear on our website. Read more about how we make money >
A form of efficiency for an economic allocation. An allocation is Pareto efficient if there is no feasible reallocation that can raise the welfare of one economic agent without lowering the welfare of any other economic agent. The concept of Pareto efficiency can be applied to any economic allocation whether it emerges from trade, bargaining, strategic interaction, or government imposition. The First Theorem of Welfare Economics states that the equilibrium of a competitive economy is Pareto efficient. This is often explained in terms of efficiency in consumption (allocation of commodities between consumers), production (allocation of inputs between firms), and product mix (the composition of output from firms). The outcome of bargaining fleed not be Pareto efficient if there is asymmetric information, but Pareto efficiency is usually imposed as a characteristic of a good bargaining mechanism. The Nash equilibrium of a strategic game also need not be Pareto efficient. This occurs in games such as the prisoners’ dilemma because of the conflict between private and social rationality. It has to be stressed that even if an equilibrium is Pareto efficient it may not be equitable.
Reference: Oxford Press Dictonary of Economics, 5th edt.
More definitions
Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >