Pareto efficiency

A state is Pareto efficient when no feasible change can improve one person’s welfare without reducing someone else’s. It does not imply fairness or maximize total welfare.

Pareto improvement: A change that makes at least one person better off and no one worse off. A state is Pareto efficient precisely when no such feasible change remains.
Kaldor–Hicks efficiency: A change is Kaldor–Hicks efficient if its winners could compensate its losers and still gain. Unlike Pareto efficiency, it permits actual losses when hypothetical compensation is possible.
General equilibrium theory: The study of how prices and decisions across interconnected markets jointly determine economic outcomes. Its equilibrium results connect market behavior to Pareto efficiency.
Welfare economics: The branch of economics that evaluates how policies and institutions affect social welfare. Pareto efficiency is a central criterion in its evaluation of economic states.
Pareto frontier: The set of feasible outcomes for which improving one objective requires worsening another. It collects the efficient outcomes among which a change entails a trade-off.
Utilitarianism: An ethical theory that evaluates outcomes by their contribution to aggregate welfare or happiness. Maximizing summed welfare can select an outcome that is not Pareto efficient if feasible gains remain.
Market failure: A condition in which market outcomes fail to allocate resources efficiently under a stated welfare criterion. Externalities and other failures can leave feasible Pareto improvements unrealized.
Arrow's impossibility theorem: A theorem showing that no social choice rule satisfies a specified set of fairness conditions for three or more alternatives. It highlights the limits of aggregating individual preferences into a complete social ranking.
Feasible allocation: A distribution of resources or outcomes that satisfies the constraints of a specified system. Efficiency is assessed only against changes allowed by the allocation constraints.
Equity (economics): A normative idea concerning fairness in the distribution of resources, opportunities, or welfare. An efficient allocation can be highly unequal, so efficiency alone cannot settle fairness.

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