Pareto improvement
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
A Pareto improvement is a change that makes at least one person better off and nobody worse off. It is the strictest test of whether a change is good for society, because no one has any cause to object.
When no Pareto improvement is left, the economy is Pareto efficient. At that point, nobody can be made better off without making someone else worse off.
Example
Say a farmer has surplus rice and wants wheat, and a neighbour has surplus wheat and wants rice. If they swap voluntarily, both end up better off and no one else is harmed. That swap is a Pareto improvement.
Don't confuse with
- Kaldor-Hicks efficiency: this allows some people to lose, as long as the gainers could compensate them and still be ahead. A dam that displaces villages may pass Kaldor-Hicks but is not a Pareto improvement.
- Pareto efficiency: the end state where no more Pareto improvements are possible. It is not the same as a fair outcome.
Related concepts
- Pareto efficiency
- Allocative efficiency
- Productive efficiency
- Welfare economics
- Kaldor-Hicks efficiency
- Social welfare function
- Theory of the second best