Paretoetulinja

Paretoetulinja, known in many contexts as the Pareto frontier, is a concept in welfare economics and decision theory that describes the boundary of Pareto-efficient allocations in a given economy or decision problem. An allocation is Pareto-efficient if no other feasible allocation can make at least one individual better off without making someone else worse off.

Formally, in an economy with a set of agents and feasible allocations, an allocation is Pareto efficient when there is no other feasible allocation that weakly improves every agent’s utility and strictly improves at least one agent’s utility. The Paretoetulinja thus consists of all and only the Pareto-efficient allocations. In graphical terms, it forms the frontier of the feasible set in the space of utilities or in production-consumption spaces, separating efficient from dominated outcomes.

In a two-agent, two-good setting with interior solutions, Pareto-efficient allocations satisfy equal marginal rates of substitution, meaning the rate at which one agent is willing to trade one good for another equals the rate for the other agent. More generally, convex preferences and continuous trade-off structures yield a continuous Paretoetulinja.

Applications include policy evaluation, welfare analysis, and multi-criteria optimization, where more than one objective must be balanced. Limitations of the concept include that Pareto efficiency says nothing about equity or overall value; many Pareto-efficient outcomes can be highly unequal, and the frontier depends on the chosen feasibility constraints and assumptions.

The concept is named after Vilfredo Pareto. Related ideas include Pareto improvement, Pareto efficiency, and the production possibility frontier.