What is Pareto efficiency?

A bit of history

To be fair, we note that "Paretoefficiency "as the concept has arisen completely not from an empty place. As early as 1776, the world-famous Englishman Adam Smith spoke about the existence of the invisible hand of the market, implying a force under it, which constantly directs the market to a general equilibrium. Subsequently, this idea was further developed by the Italian economist V. Pareto, who added a criterion for the optimality of resource allocation.

Concept and application

The formulation of this rule is quite simple: "Any change or innovation that does not cause anybody losses that can benefit some people (in their own opinion) should be considered an improvement." The effectiveness of Pareto has a very broad meaning. This criterion can be used to solve all possible problems of optimization of systems in which it is required to improve some indicators provided that the others do not deteriorate. In addition, Pareto efficiency is often applied in the context of the compositional approach to the planning of the development of economic systems, taking into account the interests of their economic entities.pareto efficiencyNote that the final optimal states canthere are several, and if they satisfy this rule, then any of them has a right to exist. They all constitute the so-called "Pareto set" or "many optimal alternatives". Since the wording of the criterion allows for any changes that do not bring 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 should take into accountanother law, named after an Italian economist. It is called "80/20 rule". This Pareto principle, the example of which is met at every step, says: "80% of the result brings only 20% of all efforts made for it, and the remaining 80% of the works provide 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 is facing this situation). So, we should allocate those 20% of classes, which are really important for us, and stop spending our leisure time on 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: 80% of clothes we put on only in 20% of cases - is not it time to put things in order in the wardrobe?Pareto Principle ExampleIf we add to this the effectiveness of Pareto, then we can draw the following disappointing conclusions, which will have to be reconciled:

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 individual actions.

So if something suddenly does not work out, it's not worth itto give up. It is impossible to resist the universal law. It is only a moment to stop, draw conclusions, and then continue to act until the desired result is obtained.

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