- noun (written as Pareto optimality)an situation in which the welfare of the community is at its maximum, and it is therefore impossible to increase the welfare of one individual without making another worse off.
An allocation of resources such that no one can be made better off without at least one other person being made worse off. In both cases, being better off or worse off is judged from the viewpoints of the indi viduals in question. Its attraction to economists is three-fold: (1) it does not require the direct comparison of individuals' utilities ; (2) it is readily applicable to market transactions, where compensation takes place as a matter of course, usually in monetary form; (3) it seems to be relatively uncontroversial - after all if anyone who could conceivably object to a proposed change is adequately compensated (as they see things), then who could - or ought to - possibly object? This gives away the implicit liberal political underpinning of the Paretian approach, which is an attraction to some and unappealing to others.
The Paretian approach is not able to categorize changes as desir able or undesirable when some have uncompensated losses. It is a vulgar error to infer from this that the Pareto criterion rules such changes out. It does not; it is simply silent about them. It is also silent about changes whose purpose is to affect the distribution of income, or health (or utilities). It is, in fact, silent on quite a lot of important issues.
Economists have amused themselves (probably not anyone else) by considering awkward cases, like the negotiations that might be successfully concluded between a masochist and a sadist and how they can be regarded in terms of welfare -enhancement. They have also examined the situation when transfers of income, otherwise not evaluable in Paretian terms, are themselves sources of utility (for example, to charitably inclined people). Named after Vilfredo Pareto (1848-1923) the Italian economist who was a leader of the Lausanne School of Economics.