Pareto efficiency
Also known as: Pareto optimality
An outcome where no one can be made better off without making someone worse off.
What it means
A state of allocation in which it is impossible to improve any individual's situation without harming at least one other — the benchmark of economic efficiency. A change that helps someone while hurting no one is a Pareto improvement, and an allocation with no such improvements left is Pareto efficient. The concept is deliberately silent about fairness: many efficient allocations may be deeply unequal, and an equal one may be inefficient, so efficiency and equity are distinct goals. It matters because it defines the upside in cooperation problems — the prisoner's dilemma's tragedy is precisely that rational play lands on a Pareto-inefficient outcome.
Examples
Mutual cooperation in the prisoner's dilemma is Pareto efficient; mutual defection is not, since both could do better.
Two flatmates swap chores — one hates dishes, the other hates vacuuming. Trading makes both better off and nobody worse: a Pareto improvement, and once no swaps remain, an efficient split.
An allocation where one person holds everything and no one can gain without that person losing is Pareto efficient — proof that efficiency says nothing at all about fairness.
First described in Vilfredo Pareto (early 1900s).