Understanding Pareto Efficiency in Resource Allocation

Pareto efficiency, developed by Italian economist Vilfredo Pareto, defines a resource allocation state where it is impossible to reallocate resources to improve one participant's situation without worsening another's. This concept is applied in economics, engineering, computer science, and social sciences. In economics, a situation is Pareto optimal if no individual's situation or utility can be improved without worsening another's. Three conditions must be met for an economy to be considered Pareto efficient: exchange efficiency, production efficiency, and product mix efficiency. Pareto efficiency is not directly related to social equity, and a socially optimal state may be Pareto efficient, but the reverse is not true. The concept is also used in general equilibrium theory and in computer science for resource allocation.