Envy and efficiency

Joseph Heath1 The Pareto principle states that if a proposed change in the condition of society makes at least one person better off, and does not make anyone else worse off, then that change should be regarded as an improvement. This principle forms the conceptual core of modern welfare economics, and exercises enormous influence in contemporary discussions of justice and equality. It does, however, have an Achilles’ heel. When an individual experiences envy, it means that improvements in the condition of others may worsen the condition of that individual. As a result, envy has the potential to block a vast range of changes that we might intuitively be inclined to regard as Pareto improvements. (Or more precisely, envy results in too many states getting classified as Pareto-optimal, not because, intuitively, they cannot be improved upon, but because no one’s condition can be improved upon without making someone else envious.) For example, a market exchange between two people might not wind up being classified as a Pareto improvement if the benefits produced for the two parties generated envy in some otherwise uninvolved third.
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