Difference between revisions of "Pareto efficiency"
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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". | 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". | ||
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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. | 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. | ||
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==External links== | ==External links== | ||
*[http://wilcoxen.cp.maxwell.syr.edu/pages/225.html Pareto Efficiency] by Peter J. Wilcoxen | *[http://wilcoxen.cp.maxwell.syr.edu/pages/225.html Pareto Efficiency] by Peter J. Wilcoxen | ||
Revision as of 02:33, May 6, 2007
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. It was named after Vilfredo Pareto.
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:
- at least one participant can improve his own outcome while
- 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.
If a participant can improve his outcome without hurting anybody else, the new decision set Pareto dominates the old one.
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.
External links
- Pareto Efficiency by Peter J. Wilcoxen
- Definition of Pareto efficiency by Martin J. Osborne