What is Pareto efficiency?

Efficiency Pareto is most often used to refer to a state of the economy that allows society to extract the maximum possible utility from all available technologies and resources. At the same time increasing the share of any market participant necessarily entails a deterioration in the situation of others.

A bit of history

For fairness, we note that "Pareto efficiency" as a concept did not come from nothing. As early as 1776, the world-famous Englishman Adam Smith spoke of the existence of the invisible hand of the market, implying a force under it, which constantly directs the market to a general equilibrium. Subsequently, this idea was further developed by the Italian economist V. Pareto, who added to it the criterion of the optimality of resource allocation.

Concept and application

The wording of this rule is quite simple: "Any change or innovation that does not cause anybody losses that can benefit some people (in their own opinion) should be considered an improvement." The effectiveness of Pareto has a very broad meaning. This criterion can be used to solve all possible problems of optimization of systems in which it is required to improve some indicators provided that the others do not deteriorate. In addition, the efficiency of Pareto is often applied in the context of compositional approach to the planning of the development of economic systems , taking into account the interests of their economic entities. We note that there can be several finite optimal states, and if they satisfy this rule, then any of them has the right to exist. They all constitute the so-called "Pareto set" or "set of optimal alternatives". Since the wording of the criterion allows for any changes that do not bring additional damage to anyone, there may be quite a few such options, but in any case, their number is finite. The situation in which the Pareto efficiency is obtained is the state of the system in which all the benefits of the exchange are used.

80/20

When looking for optimal solutions, one more law, named after the Italian economist, should be taken into account. It is called "80/20 rule". This Pareto principle, the example of which occurs at every step, says: "80% of the result brings only 20% of all efforts made for it, and the remaining 80% of the work provides only 20% of the total result." How can this knowledge be applied in life? For example, there is a clear lack of free time (now almost everyone is facing this situation). So, we should allocate those 20% of classes that are really important for us, and stop spending our leisure time on 80% of all nonsense. In trade: most of the sales come from regular customers, which means that you need to build long-term relationships with customers. At home: 80% of clothes we put on only in 20% of cases - is not it time to put things in order in the wardrobe? If we add to this the effectiveness of Pareto, then we can draw the following disappointing conclusions, which will have to be reconciled:

1. Most of what we do will not give us what we plan to get in return.

2. Expectations and reality rarely coincide. It is always worth adjusting for random factors.

3. High results can be achieved only through individual actions.

So if something suddenly fails, do not give up. It is impossible to resist the universal law. It is only a moment to stop, draw conclusions, and then continue to act until the desired result is obtained.