Pareto Improvement

Reviewed by Komal | Updated on Aug 27, 2020

What is a Pareto Improvement?

A Pareto improvement occurs under the rubric of neoclassical economic theory when a change in distribution harms no one and helps at least one person, given the initial allocation of goods for a set of persons.

The theory suggests that improvements to Pareto will continue to enhance an economy's value until it achieves a Pareto equilibrium, where improvements to Pareto are no longer possible.

Understanding Pareto Improvement

In the macro sense, a Pareto improvement is an action that leads to an economic advantage without making anyone worse off. Given an initial allocation of goods or resources for a set of individuals, a Pareto improvement was made if a change in resources benefits at least one person while harming no one else.

These improvements will go on to a point where the allocation is Pareto efficient, that is when no more allocation changes can be made without making anybody worse off. Improvements to Pareto aim to satisfy stakeholders instead of creating an efficient system or equitably distributing resources.

Pareto in Practical Scenario

In addition to economic applications, the concept of Pareto improvements can be found in the areas of life sciences and engineering, in any academic field where trade-offs are recreated and examined to determine the number and type of resource variables needed to achieve Pareto equilibrium.

Examples of Pareto Improvement

Suppose two families, one wealthy and another poor, are disbursed an equal amount of funds. The funds help lift the latter above the poverty level but make little difference to the former's overall income. This change is an example of a Pareto improvement.

Another instance of Pareto improvement is the case of two students swapping lunch boxes. One student, who doesn't like burgers, gives it to another student who thinks it is tasty. Although one of the students is giving away his burger, no one is worse off, and both students are satisfied with the exchange of the trade. This is an example of a Pareto improvement.