Pareto optimal

economic-dictionary

The Pareto optimal concept defines any situation in which it is not possible to benefit one person without harming another.

Thus, the Pareto optimum is that point of equilibrium where you cannot give or ask without affecting the economic system. It was developed by the Italian economist Vilfredo Pareto and is also known as efficient allocation in the Pareto sense or Pareto-superior economy point.

The Pareto optimum is based on utility criteria: if something generates or produces profit, comfort, fruit or interest without harming another, it will awaken a natural process that will allow reaching an optimum point. In this sense, Vilfredo Pareto sought to scientifically determine where the greatest achievable well-being of a society was.

The solution that he found through the optimum comes to say that the maximum common prosperity is obtained when no person can increase his well-being in an exchange without harming another. Or, what is the same, if the utility of one individual increases, without the utility of another decreasing, the social welfare of the individuals increases.

Economic well-being depends on the utility functions of the individuals who make up society. Profits, on the other hand, are based on the quantities of goods that exist in the market; and they - the quantities of goods - are determined by the levels of production and consumption of an economy.

Consequently, the maximization of well-being will have a close relationship both with the optimal use of the productive resources of the economy and with the conditions of optimization of consumption.

In Pareto optimal it is understood that resources are distributed efficiently. In fact, the existence of efficient allocations in terms of Pareto is one of the basic principles of the first welfare theorem. There are several requirements that are needed to achieve this economy of well-being:

  • Efficiency in the distribution of goods among consumers
  • Efficiency in the allocation of factors between companies
  • Efficiency in the allocation of factors between products.
Nash equilibrium

Representation of a pareto optimum

Supposing that we have two people (f1 and f2) among whom to distribute a series of goods. Point 1 (P1) means that F1 is distributed more than F2, but they are all being distributed. In Point 2 (P2) they are also distributed all but are awarded more to f2 than to f1.

In economics, the damage, loss or damage that is caused in these cases to other individuals is called efficiency cost, it is what happens when you go from Point 1 (P1) to Point 2 (P2) or vice versa. While f2 improves, f1 worsens. Both are Pareto optimal, because whenever you try to improve one, you will make the other worse.

Everything below these points is not optimal, because not all resources are being distributed efficiently. The points above (such as p3) are points unattainable with the available resources.

Uses of the Pareto Optimum

In the economic day there are many examples in which finding an efficient allocation in the Pareto sense is essential, many of them related to making decisions about the distribution of goods, services or factors of production, such as the distribution of wealth in the world. For example, the welfare situation achieved through the Pareto optimum provides an extremely useful framework for evaluating public policy measures whose stated purposes are to increase the efficiency and / or increase the distributive equity of a country's resources. .

It should also be noted that the Pareto optimum is a fundamental work tool for many disciplines such as mathematics, but its use in negotiation processes and in what is known as game theory, in which strategies are studied, stands out. optimal used by individuals in different games, because it offers, within its limits, clear decision parameters.

Pareto optimal example

If we take the example of a market in which 20 trucks are distributed between 2 companies, we can find up to 20 different assignments that can be considered as optimal according to this theory.

Although the fairest thing would be to distribute the vehicles equally (10 and 10), in any type of distribution that is made, the Pareto condition will be fulfilled, since whenever one company improves its endowment the other will be negatively affected. For one to win, there must always be another who loses, basically. Despite this, it is efficient because all 20 are distributed anyway, even if it is not socially fair. For example, it would not be efficient to distribute 19 in total (giving 10 and 9 for example). And it is not possible to distribute a total of 21 because there are not enough resources.

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