What is Pareto efficiency?

Pareto efficiency is a way to say that an allocation of resources has no free improvements left. It matters because it gives a minimal test for waste, although it says nothing about whether the split is fair.

How it works

Start with any allocation of resources among people. If you can move to another allocation where at least one person is better off and nobody is worse off, the first one was not efficient, and the move is called a Pareto improvement. When no such move exists, the allocation is Pareto efficient.

Many different allocations can be efficient, including very unequal ones. One person holding everything is efficient in this sense, since any change would hurt that person. For this reason the concept is used together with other tests, such as fairness, to choose between efficient options. Its strength is simple: it flags a plain waste.

Example

Say two neighbors share 10 units of water. Neighbor A uses 6 units and gets a benefit of 12, and neighbor B uses 4 units and gets a benefit of 6. If moving 1 unit from A to B lowers A's benefit by 1 and raises B's by 3, then both can be better off if B shares some of the gain, so the first split was not efficient. When moving a unit would hurt one side by exactly what it helps the other, the split is efficient. The numbers are an illustration.

How to model it in Machinations

Build two Pools for the two parties' benefit and a Pool for the shared supply. Use a Converter with a Register for each party that turns water into benefit at a diminishing rate. A Lever sets how the supply is divided. Play with different splits and chart both benefits together to see which splits leave room for a change that helps one side without hurting the other.