This lecture explains Pareto efficiency, the primary way we compare the relative quality of outcomes in game theory.
Takeaway Points
- An outcome is Pareto efficient if there is no other outcome that increases at least one player’s payoff without decreasing anyone else’s.
- Likewise, an outcome is Pareto inefficient if another outcome increases at least one player’s payoff without decreasing anyone else’s.
- Note that Pareto efficiency permits indifferences. For example, an outcome that pays <12, 2> Pareto dominates an outcome that pays <9, 2>.
- Pareto efficiency is a very weak form of efficiency because it does not make comparisons between players. However, the fact that expected utilities are identical across positive affine transformations implies that interpersonal comparisons have no meaning.
