Pareto efficiency

In Game Theory and economics, the concept of Pareto efficiency (or Pareto optimality) is a method to judge the efficiency of a set of decisions made by the participants.

A set of decisions "x/y" (meaning that participant A chooses "x" while participant B chooses "y") is called Pareto optimal if there is no other state in which:

1. at least one participant can improve his own outcome while
2. no other participants receives a worse outcome than he does now.

Putting it into less formal style: As long as a player can improve his outcome without hurting anybody else, the situation is not Pareto efficient.

An example

		B
		1	2
A	1	A: bad / B: bad	A: bad / B: good
	2	A: good / B: bad	A: good / B: good

In the case shown at the right side, participants A and B can choose between "1" and "2". The result can either be "good" or "bad".

The highlighted field ("2/2") is the Pareto optimal situation. All other situations can be improved.

For example, in "1/2" ("bad" for A, "good" for B), A could switch to "2". The result improves A's result to "good" while leaving B's result unchanged.