Pareto Improvement

One of the founders of economics as a modern science, Vilfredo Pareto's work deals with the concept of utility, more specifically, marginal utility and the collective maximization of such; thus his work is of great interest to the theory and study of welfare economics.[1] Pareto's work spans a variety of studies from welfare economics to political economy to legal economics and others.
There are two main theories within his works collectively referred to as Pareto Principles:

  1. Pareto improvement
  2. Pareto efficiency or Pareto Optimization

Pareto Improvement

Pareto improvement is a condition on the way to Pareto efficiency whereby goods can be re-allocated to make at least one person better off without making any other individual worse off. Pareto improving behavior, in theory, will continue until Pareto efficiency is reached.[2]

Individual Initial Allocation Initial Utility Level New Allocation New Utility Level
Person 1 Good A x Good C x +1
Person 2 Good B x Good A x
Person 3 Good C x Good B x

All three individuals started at the same level of utility, x, after the re-allocation the utility of Person 1 increased to x+1 and the others remained the same. This is a Pareto improving allocation because no one individual was made worse off, in a Pareto efficient model, this is not possible. So, if a system is not Pareto efficient, it means that there is room for Pareto improvements to be made. The goal of Pareto improvement is to distribute goods in such a way that everyone is "happy" or "satisfied" and to reach a Pareto efficient state in order to prevent market failure.

An example of a Pareto improvement would be if a group of people did not have electricity but overtime were able to install a small solar farm which brought electricity to their village. The electricity would allow the village to cook and heat their homes with electricity instead of charcoal which has harmful effects on the respiratory systems of the users. Assuming the electricity is accessible to everyone and the farm does not interfere with anyone in the village, it would be a Pareto improvement because the village is made better off without anyone being made worse off. See access to electricity and access to non-solid fuels for more on the effects of this.

See Also

References

  1. R. Marchionatti and F. Mornati, ed. Considerations on the Fundamental Principles of Pure Political Economy. New York: Routledge, 2007, pp. xi.
  2. J.Black, N. Hashimzade, and G. Myles. (2009) "Value Judgment." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-3287?rskey=GyTkkF&result=1 , 2009 [May 31, 2016]

Authors and Editors

Lyndon G., Jordan Hanania, Jason Donev
Last updated: September 17, 2016
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