Paretos criterion

Pareto's criterion (Pareto, 1971) provides a scale for measuring increase in the collective welfare of a group. Collective welfare is deemed to have increased if the welfare of one or more members of the group increases without diminishing the welfare of the other members. The criterion not only comprises a measure of the direction of change, but also its end point. According to this criterion, collective welfare is at optimum as soon as it is no longer possible to increase the welfare of one or more individuals without decreasing that of one or more of the others.

Pareto's criterion does not imply a value judgment. It does not dictate that collective welfare must increase, but merely offers a means of measuring any increase. It must be known which groups are enjoying the increase. If, for instance, it is only individuals with a relatively high income who profit from an increase in welfare, the change merely accentuates the unequal distribution of wealth and can be rejected on these grounds, despite the fact that Pareto's criterion has been met (Van den Doel, 1993).

If a design is regarded as a plan for the distribution of costs and benefits among the parties involved, Pareto's criterion can be applied. The design is then at optimum when it can no longer be improved to the benefit of one or more of those involved without diminishing the benefits enjoyed by one or more of the others, benefits which they would enjoy if one of the earlier versions of the plan were implemented.

Practical objections to Pareto's criterion arise from the fact that changes in welfare seldom meet the criterion, since almost every gain for some entails some form of loss for others. The compensation principle has been formulated to overcome these objections. This principle involves assessing whether the 'winners' are able to compensate the loss suffered by the 'losers'. If the winners enjoy such a large profit that, after the losers have been compensated for their loss, a net profit still remains, it may be said that the change in welfare is potentially an improvement in terms of Pareto's criterion.

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