131
inefficient: a transfer of chicken
from John to Jane would help Jane
without hurting John. Often
preferences aren’t so clear cut: both
might like chicken and rice but to
different degrees. In that case Jane
and John can exchange just small
amounts of chicken and rice until
an optimal allocation emerges.We can all agree
Using Pareto efficiency reduces the
need to judge between conflicting
interests. Avoiding such judgments
is the hallmark of positive economics
(describing how things are), as
opposed to normative economics
(prescribing how they should be).
Pareto argued that free markets are
efficient in his sense of the term.
This formalized Adam Smith’s idea
that self-interest and free market
competition operate for the
common good (pp.54–61). ■constrained as they are by the
obstacles they face, society will
soon reach a point where no one
can be made better off without
hurting someone else. This state
is known as Pareto optimality, or
Pareto efficiency.
Pareto efficiency
Suppose a couple named Jane and
John both like rice. If we have a
sack of rice, any division of it
between them—even one where
one person gets all the rice—would
be optimal, because only taking
rice away from a person is said to
hurt them. In this way Pareto
efficiency is different from fairness.
In most situations there are
many goods and tastes. For instance,
if John likes rice but not chicken,
and Jane likes chicken but not
rice, an allocation in which John
had everything would be Pareto
Vilfredo Pareto
Born in France in 1848,
Vilfredo Pareto was the son
of an Italian marquis and a
French mother. The family
moved to Italy when he was
four, and Pareto was schooled
in Florence, then in Turin,
where he acquired a PhD in
engineering. While working
as a civil engineer, he became
interested in economics and
free trade. In 1893, he was
recommended by his friend,
the Italian economist Maffeo
Pantaleoni, to succeed Léon
Walras (p.120) to the chair of
political economy at the
University of Lausanne in
Switzerland. He took up the
post at the age of 45, and it
was there that he made his
major contributions to the
field, including his theories on
income distribution.
Pareto continued to teach
until 1911. His works were
prolific, covering sociology,
philosophy, and mathematics
as well economics. He died in
Geneva in 1923.Key works1897 Course of Political
Economy
1906 Manual of Political
Economy
1911 Mathematical EconomicsSee also: Free market economics 54–61 ■ Economic equilibrium 118–23 ■
Markets and social outcomes 210–13
INDUSTRIAL AND ECONOMIC REVOLUTIONS
0QUANTITY OF FLOWERSQUANTITY OF VEGETABLES0The Pareto frontierBACPareto efficiency can be used to
determine efficient production. If two
people own a garden, and one prefers
flowers while the other prefers vegetables,
the garden can be planted with flowers,
vegetables, or a combination of both.
Any point on the Pareto frontier, such
as B or C, is Pareto efficient. Any point
under the line, such as A, is inefficient.