Pareto Optimality

Pareto optimality is a concept originated by the nineteenth-century marginalist economist Vilfredo Pareto. As it has come to be used throughout economics and political science, it refers to a joint social state in which no single individual's condition can be improved without detracting from one or more other individuals' conditions. In a free market system, the phrase captures the idea that all possible voluntary exchanges of goods between individuals are exhausted. Otherwise, if two individuals' states could be improved, they would trade goods, and the former state could not be considered “optimal.”

Deriving as it does from marginalist economics, Pareto optimality is a technical, mathematically defined term that has since found usefulness in philosophical discussions addressing justice. The concept is technical because identifying the state under which an individual's condition may be said to have improved or declined is objectively defined in precise terms. This is achieved by identifying individuals by their preferences over various bundles of commodities, and also by their budget constraints. Because it is presupposed in the model that individuals always prefer more goods to less, any subtraction of one type of asset must be offset by an addition of another type of asset with more value to the agent, if that agent's state has improved. This reflects the standard view that, given original endowments and exact property rights, market transactions optimally improve the overall individually estimated well being of a population without recourse to nonvoluntary redistribution. Pareto optimality does not assume that individuals have numerically expressed, or cardinal, preferences over commodity bundles. Nor does it specify one superior social state, but rather it refers to numerous possible resource allocations that fit its definition. Most importantly, it is widely acknowledged that even if it is accepted that a Pareto optimal state is superior to a suboptimal state, Pareto optimality provides no indication of the satisfactoriness of the overall resource allocation from a distributive standpoint. A state could be Pareto optimal in which one percent of the population owns ninety-nine percent of the society's resources.

Although originally developed in the context of early twentieth-century neoclassical economics, in which individuals express preferences over personal commodity bundles, Pareto optimality has been restated to have relevance to contemporary social choice and game theory. In the latter, agents have preferences over global end states that specify everyone's status. The strict Pareto condition applied in social choice theory stipulates that if all individuals in a group prefer state x to state y, then the group may be said to prefer state x to state y. Another version of Pareto optimality is also used in social choice and game theory to identify as socially preferred state x over state y for the case in which some number of individuals of a group (at least one) prefer outcome x to outcome y and none of the remaining members prefer y. The latter version does not require that group members unanimously prefer state x over state y to identify x as socially preferred, but permits indifference between the two end states for some subset of the group's members.

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