Pareto efficiency
No alternative makes someone better off without making someone else worse off.
Often misread asTreating Pareto efficient as a synonym for good, fair or socially best, and so assuming an efficient outcome is one to be pleased about.
How to see it
No free improvement left
An outcome is Pareto efficient if you cannot make anyone better off without making somebody else worse off. It is a test applied to the whole table of outcomes, not to anyone's incentives, and it is perfectly compatible with an outcome being grim.
The checkEfficiency only rules out improvements that cost nobody anything; one player taking everything is usually efficient.
Try itList the four outcomes of the prisoner's dilemma and mark the Pareto efficient ones. Three of the four qualify, including both outcomes where one player is betrayed, and the single equilibrium is the one that does not.
Games that show it
Know these first
Leads on to
Easily confused with
Sources
- von Neumann, J. & Morgenstern, O. (1944). Princeton UP.