PARETO FRONTIER Meaning and
Definition
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The Pareto frontier, also known as the Pareto efficient set or Pareto optimal set, is a concept in economics and optimization theory that represents the set of all possible outcomes or allocation of resources in a system where it is not possible to improve the well-being of one entity without worsening the well-being of another entity.
Initially introduced by the Italian economist Vilfredo Pareto, the Pareto frontier is represented by a curve in a multi-dimensional space where each point on the curve represents an allocation of resources among different parties. The key characteristic of the Pareto frontier is that it includes all the allocations where no party can be made better off without making another party worse off.
In practical terms, the Pareto frontier helps decision-makers assess trade-offs between different objectives or goals. It provides a clear visualization of the trade-off between different criteria or parties, allowing decision-makers to identify the optimal allocation that maximizes overall welfare without causing any harm to any stakeholder.
In summary, the Pareto frontier is a fundamental concept that aims to find the best possible outcome in a system where competing objectives or parties need to be considered. It is a valuable tool in optimizing resource allocation, improving policy-making decisions, and assessing the efficiency of economic or social systems.
Etymology of PARETO FRONTIER
The term "Pareto frontier" is derived from the name of an Italian economist named Vilfredo Pareto, who is known for his work on economic equilibrium and the distribution of wealth.
The concept of a Pareto frontier or Pareto efficiency originated from Pareto's studies on welfare economics and social choice theory. In the early 20th century, Pareto observed that in an economic system, it is often impossible to make one individual better off without making another individual worse off, unless the overall efficiency of the system improves.
Pareto introduced the concept of Pareto efficiency to describe a situation where resources are allocated in such a way that it is not possible to reallocate them to make any one individual better off without making someone else worse off. The term "frontier" refers to the boundary or limit of what is feasible or attainable in terms of resource allocation and efficiency.
