Pareto efficiency is most often used to denote a state of the economy that allows society to extract the maximum possible usefulness from all available technologies and resources. Moreover, an increase in the share of any market participant necessarily entails a deterioration in the position of others.
A bit of history
To be fair, we note that “Pareto efficiency” as a concept did not arise from scratch. As far back as 1776, the world famous Englishman Adam Smith spoke of the existence of an invisible hand of the market, implying by it the force that constantly directs the market to general equilibrium. Subsequently, this idea was finalized by the Italian economist V. Pareto, who added to it the criterion of the optimal allocation of resources.
Concept and application
The wording of this rule is quite simple: "Any change or innovation that does not cause any loss to anyone that could benefit some people (in their own opinion) should be considered an improvement." Pareto effectiveness has a very broad meaning. This criterion can be used to solve all sorts of problems of optimizing systems in which it is necessary to improve some indicators, provided that the rest do not deteriorate. In addition, Pareto efficiency is often used in a compositional approach to planning the development of economic systems , taking into account the interests of their economic objects.
Note that there can be several final optimal states, and if they satisfy this rule, then any of them has the right to exist. All of them make up the so-called "Pareto set" or "set of optimal alternatives." Since the wording of the criterion allows any changes that do not bring any additional damage to anyone, there may be quite a few such options, but in any case their number is finite. The situation in which Pareto efficiency is obtained is the state of the system in which all the benefits of the exchange are used.
80/20
When searching for optimal solutions, one more law should be taken into account, named after the Italian economist. It is called so: "80/20 rule." This Pareto principle, an example of which is found at every step, states: "80% of the result is brought only by 20% of all efforts put into 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 faces this situation). This means that we should highlight those 20% of classes that are really important for us, and stop spending our leisure time by 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: we put on 80% of clothes only in 20% of cases - is it time to put things in order in the wardrobe?
If you add Pareto's effectiveness to this, you can draw the following disappointing conclusions, which you have to put up with:
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 isolated actions.
So if suddenly something does not work out, do not give up. It is impossible to resist the universal law. One has only to pause for a minute, draw conclusions, and then continue to act until the desired result is obtained.