When evaluating proposed or existing policy measures, economists & government officials typically aim to improve the lives of others. The objective of any given tax, welfare, or law change is to improve the lives of many citizens while not worsening the lives of others. The most ideal policies improve the lives of others without making anyone else worse off. This is what we refer to as Pareto efficiency.

Something Pareto efficient makes one person better off without making anyone worse off. The state of Pareto efficiency is one in which it is impossible to make someone better off without making anyone else worse off. This would indicate that in this state resources are allocated perfectly.

So, where could we find Pareto efficiency?

Well, lets say you are babysitting 2 children, and have 4 candies. You can allocate these candies a number of ways.

Child A gets 0, Child B gets 4

Child A gets 1, Child B gets 3

Child A gets 2, Child B gets 2

Child A gets 3, Child B gets 1

Child A gets 4, Child B gets 0

or, you could keep them all for yourself.

Now, if you are me, you would want to keep these all for yourself. Good choice! I'm sure you can guess which allocation is Pareto efficient - both kids get 2 candies. This allocation of candy is Pareto efficient because if we moved up or down either way, one child would be worse off.

It is commonly accepted that Pareto efficiency should be a criteria for any given public policy or economic system. While not every public policy will end up being good for everyone, the idea is to find the lesser evil within your options. Pareto efficiency does not equal desirability, it just means that you have found the most efficient way to deal with something.

Where else can you hear about Pareto efficiency?

The field of welfare economics discusses Pareto efficiency quite often. A theory called the first welfare theorem says that free markets (that is, those with perfect information, no barriers to entry, etc) accomplish Pareto efficiency on their own.

Featured

Moral Money: The Nature of Money & Principles of Bitcoin

Money represents a social agreement, which has implications for how we value wealthy people. Bitcoin replaces the need for this social agreement with technology, and in doing so challenges the values we ascribe to wealth.

Why Using Venmo Makes You Happier

Popular mobile payments app Venmo enjoys the benefits of behavioral economics biases, causing users to feel less pain from spending money. Learn how it works, and how businesses can capture the "Venmo effect".

Snapchat as the Future of Brand Relationships

Deep-dive into the increasingly personal way we interact with brands, fueled by Snapchat and Instagram.

Thoughts on the Rapidly Changing Landscape of Cultural Consumption

Some musings on the benefits of the changing cultural consumption landscape (including the shift to streaming of music and TV).

There's No Room For Emotion in Capitalism

Females are prescribed psychiatric drugs at much higher rates than men. Females also tend to be more emotional (wide generalization). Processing emotions takes time, and time spent on emotional work is time NOT spent generating revenue. Ultimately, the trend of medicating female emotion (and emotion in general) is a money-driven one.

Economics in the Internet of Things

The Internet of Things (IoT) is the future of technology, but also represents some interesting economic phenomena not-so-frequently seen.

Surge Price My Latte

We all hate surge pricing, but it's a great way for Uber and its drivers to capture more value. What if GrubHub, Starbucks, etc. charged customers more during peak hours in order to pay service workers better? Could we ever break the cycle of reliance on cheap labor?

Economics Explained: Price Discrimination

Price discrimination is a way that companies can make more money by understanding how much different consumers will pay for the same good. Here's how it works.

The Economics of Being Basic

What's the economic explanation behind the rise of the term "basic"? Is this a new phenomenon, or merely a quality of human nature evident due to economic and technical changes?

We Need More Raspberry Pi

Would you pay $35 for a Raspberry Pi? No, not the food, it's a miniature computer! This device can be revolutionary for the 75 million Americans without internet access.

Economics Explained: Deflation, Central Banking, and Quantitative Easing

Do you ever forget the difference between nominal and real? Do you wonder why financiers analyze Yellen's words like a text from a crush? If so, this is the article for you!

A Case for Heirloom Harvests

When fruit flies, it fails. Industrial agricultural practices have brought us berries in January, but at the cost of quality. Read about why harvesting heirloom varieties is important for taste, small farmers, and the environment.

The Evolution of Human Worth

It used to be that the strongest hunter had the most value in society. Today, the nerdy ideas man has the most worth. What happened?

What Ice Cube Trays Say About Innovation and Change

Innovation is cyclical and inspired by other innovation. For example, this article was inspired by my purchase of innovative new ice cube trays. Read about how product variety is created, and how it can be a bad thing.

Setting the Standard: Horizontal & Vertical Integration

You may hear the terms horizontal and vertical integration tossed around in business (Businesspeople love fancy strategy terms). Learn how Standard Oil used integration to become a monopoly and how one might benefit from integration today.

Diamonds and Wedding Costs, Blood for Money, Incentives, City Size, Smartphones, and Fingerprint Technology

Will a big engagement ring buy you happiness? What about donating blood? How do you properly motivate someone? If you are looking for a job, is city size a factor? Why are smartphones important for the poor to have? All this and more.

America Has a Cheap Labor Problem

America is in trouble if the cost of Third World labor increases. As has been the tradition for all of human history, our economic success depends on the accessibility cheap and near-slave labor. How can we grow when this ends?

The Theory Behind Opportunism: Arbitrage and Interest Rate Parity

Some would claim that it is human nature to capitalize upon opportunities. Arbitrage was born of this human urge to take advantage of money-making opportunities.

Does Improving Efficiency Actually Reduce Energy Use?

Efficient appliances seem like a great way to reduce our energy use, right? Wrong - in the long run, they end up causing massive increases in energy use due to cost reductions.

An Open Dialogue About Hubbert's Curve and Peak Oil

"Run out of oil? Never!"

In all likelihood, this won't transpire, but if you aren't familiar with the idea of peak oil (or like to deny it), answer all your questions here.

We Need to Break Up Economics

Most people could tell you that oil and energy is critical to our economy and planet. In fact, energy is the foundation of all growth, but it isn't included in our economic models. Here's why the discipline of economics needs to be re-organized.

Deciphering Data: Tiger Moms, Cuffing Season, Time-Wasting, Inequality, and Determinants of Success

This edition of Deciphering Data brings you the answers to all these pressing questions and more:

At what time of year do most break-ups happen?
Why are tiger-moms a thing in the US and China?
How do different people around the world think success happens?

How Perfect Substitutes Became a Myth

The rise of American affluence gave us the luxury of choice and ability to be picky about what we like. Combined with newly formed marketing and advertising industries, consumer preferences developed that made perfect substitutes an economic unicorn. (If you don't know what a perfect substitute is, no worries, read on!)

Economics Explained: Indifference Curves

Indifference curves are not graphs of who cares less, rather, they show different combinations of goods that can give a person a certain level of utility, or well-being.

Middleman Apps, Contract Workers, Birth Rates, Infant Mortality, and Wal-Mart Banking

Do middleman apps make our lives better? What about the lives of their employees? Do Uber-like services improve consumer welfare? How do recessions affect birth rates? Why does the US have relatively high infant mortality?

Find the answers to all these questions and more.

Economics Explained: Complements, Substitutes, and Elasticity of Demand

Does this man look like he is substituting or complementing these apples? Trick question: apples are inanimate, and can't be complimented.

Deciphering Data: Earthquakes, Music, Love, and Violence

The best data visualizations from around the web. Learn about online dating, music tastes, political preferences, violence, and earthquakes.

Positive vs. Normative Statements, and Learning to Admit You are Wrong

Count von Count is never wrong, because he loves numbers!

Economics Explained: Negative Externalities and Pigovian Taxes

Did you know that higher gas prices might be better for us all? Industrialism is great, but creates negative externalities, such as pollution. Pigovian taxes reduce negative externalities and aim to also reduce distortionary taxes, like income tax. Win-win!

A Beginner's Guide to Investing

Don't be like this guy and let your money sit in the bank. Start investing with some simple tips!

Economics Explained: Pareto Efficiency