this is surely not an original insight, but I haven't seen it before

A Pareto improvement is where you make one party better off and no parties worse off.

Suppose Adam has a rare baseball card. He assigns no intrinsic value to baseball cards. Adam likes Beth, and somewhat values her happiness. Beth collects baseball cards, and would happily pay $100 for Adam's card.

If Adam just gives Beth his baseball card, is that a Pareto improvement? Naively, yes: he loses the card that he doesn't care about, and gains her happiness; she gains the card. Both are better off.

But I claim not, because if Adam has the card, he can sell it to Beth for $100. He would much prefer doing that over just giving her the card. But if Beth has the card, he can't do that. He assigns no intrinsic value to the card, but he can still value it as a trading chip.

Now suppose Adam has the baseball card but Beth also has a copy of that card. Then Beth has less desire for Adam's card, so this situation also isn't a Pareto improvement over the original. By giving something to Beth, we've made Adam's situation worse, even though Adam likes Beth and values her happiness .

And I think situations like this are common. The ability to give someone something they want, is a form of power; and power is instrumentally useful. And the less someone wants, the less able you are to give them something they want¹.

For a closer-to-reality example, the reddit comment that sparked this post said:

bringing Platform 3 back into use at Liverpool Street Underground Station was denied because the platform would not be accessible. Neither of the platforms currently in use for that line is accessible, so allowing Platform 3 to be used would be a Pareto improvement

The model here is that there are two parties, people who can access the platforms at Liverpool St and those who can't. If Platform 3 is brought back into use, the first group gains something and the second group loses nothing.

But I think that if Platform 3 is brought back into use, the second group loses some power. They lose the power to say "we'll let you bring back Platform 3 if you give us...". Maybe Platform 3 can be made accessible for $1 million. Then they can say "we'll let you bring it back if you make it accessible", but they can't do that if it's already back in use.

And they lose some power to say "if you ignore us, we'll make things difficult for you". Maybe it would take $1 trillion to make Platform 3 accessible. If Platform 3 remains out of use, people are more likely to spend $1 million to make their building projects accessible, because they've seen what happens if they don't. Conversely, if Platform 3 comes back, people are more likely to exaggerate future costs of accessibility. "If I say it costs $1 million, I'll have to pay. If I say it costs $10 million, maybe I won't."

I haven't researched the situation in question, and I expect that the actual power dynamics in play don't look quite like that. But I think the point stands.

(My original reply said: "If it's easier to turn an unused inaccessible platform into a used accessible platform, than to turn a used inaccessible platform into a used accessible platform - I don't know if that's the case, but it sounds plausible - then opening the platform isn't a Pareto improvement." That still seems true to me, but it's not what I'm talking about here. There are lots of reasons why something might not be a Pareto improvement.)

This doesn't mean Pareto improvements don't exist. But I think a lot of things that look like them are not.

Update 2018-02-02: some good comments on reddit and LessWrong. Following those, I have two things in particular to add.

First, that I like /u/AntiTwister's summary: "If you have the power to prevent another party from gaining utility, then you lose utility by giving up that power even if you are allies. There is opportunity cost in abstaining from using your power as a bargaining chip to increase your own utility."

Second, that there is a related (weaker) concept called Kaldor-Hicks efficiency. I think that a lot of the things that look-like-but-aren't Pareto improvements, are still Kaldor-Hicks improvements - meaning that the utility lost by the losing parties is still less than the utility gained by the winners. In theory, that means that the winners could compensate the losers by giving them some money, to reach a Pareto improvement over the original state. But various political and practical issues can (and often do) get in the way of that.

  1. This feels like it generalizes far beyond questions of Pareto efficiency, but I'm not sure how to frame it. Something like game theory is more competitive than it appears. Even when no two players value the same resource, even when all players genuinely want all other players to do well, players still have an incentive to sabotage each other.


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13 comments, sorted by Click to highlight new comments since: Today at 4:59 PM

I think you're right that in many situations where it seems like A can (at no direct cost to A) give B something B values that isn't a Pareto improvement because A loses bargaining power. But I would expect that in most situations something closely related is true: these losses to A are generally "second-order" effects markedly smaller in size than the direct benefit to B, which means that some change of the form "A gives B the thing, and B gives A an amount of money that's small in comparison to the benefit B just got but large in comparison to the cost A just incurred" is possible and is a Pareto improvement.

If I'm right, this doesn't invalidate the point being made here, but perhaps it blunts it a bit: saying "X would be a Pareto improvement" isn't quite right, but it might be a close enough approximation that it's reasonable for people to say it.

The thing you're talking about is called Kaldor-Hicks efficiency and I think you're right that these situations will usually be Kaldor-Hicks improvements.

There's some discussion of these over on reddit. I'm wary of equivocating between the two, for reasons pointed at in that comment thread: even if it would be theoretically possible to turn a Kaldor-Hicks improvement into a Pareto improvement, in practice that might be difficult.

Kaldor-Hicks means "A is worse off, B is better off, but some compensation from B to A will leave both better off than before". That is, in some sense B is more better-off than A is worse-off. But I'm claiming something a little stronger: that in typical situations of the type described here, B is not merely more better-off but very much more better-off, so that you can reach a genuine Pareto improvement by means of a transfer that's really small in comparison with the benefit B has received.

To me, this feels like an important distinction: it's not just that we could get to a Pareto improvement from here, it's that we're almost there already.

Fair enough, that was over-eager pattern matching on my part.

I'm not sure how true the stronger claim is. In the case of the baseball card, the opportunity cost to Adam is almost as much as the price Beth is willing to pay. And that seems like it's going to be, not universally true but common; the higher the benefit to B, the more A is capable of extracting from them, and so the higher the cost of losing that ability.

A point in favor would be that blocking a fake Pareto improvement probably has social costs that also rise with the benefit to B.

I think you're definitely right about the baseball-card example, but it's a rather artificial example because it depends on Beth being the only possible buyer for Adam's card. If there are a hundred Beths all of whom would happily give Adam $100 for his card, then magically bringing one into existence and giving it to one of the Beths costs Adam only whatever incremental reduction this brings in the "market" price of the card. (While still bringing the lucky Beth $100 worth of gain.)

Of course you can make Adam's loss be the full $100 by giving cards to all the Beths -- but now the benefit to them is much more than the $100 Adam has lost.

I haven't thought this through carefully, but it seems like the key feature here that makes your baseball-card example "work" is precisely this one-to-one relation. I don't know how common that is. It seems like something of the sort is the case with the Liverpool Street platform, or at least would be in some Libertarian World where everyone's expectation was that if a platform's inaccessible to disabled people then disabled people should band together and pay for it to be made accessible. Here in the real world that isn't quite the expectation, of course, which is more or less the point in your last paragraph.

Ah, I forgot that "the case of the baseball card" is actually two cases. I think you're right about the case where Beth gets given a new card; if there are lots of Beths, there's a large net utility gain. But I don't think that works in the case where Adam's card gets given to one of the Beths; the loss to him is still close to the market value of the card.

It seems plausibly true if we think only of the cases where... something like "A loses power because B gets something they want, but A's circumstances ignoring B are unchanged". But I don't immediately trust that to be a sensible set of cases to think about, in more complicated scenarios.

Assuming the money transfer actually takes place, this sounds like a description of gains from trade; the "no pareto improvement" phrasing is that when actually making the trade, you lose the option of making the trade -- which is of greater than or equal value than the trade itself if the offer never expires. One avenue to get actual Pareto improvements is then to create or extend opportunities for trade.

If the money transfer doesn't actually take place: I agree that Kaldor-Hicks improvements and Pareto improvements shouldn't be conflated. It takes social technology to turn one into the other.

Interesting! But I think you're using a standard term in a not quite standard way. Right now people use "Pareto" in two ways:

1) A deal can be a Pareto improvement compared to another deal, or to never making any deal.

2) A deal can be Pareto optimal (which means no other possible deal is a Pareto improvement compared to this one).

You seem to be proposing a third usage, where a deal must be a Pareto improvement compared to all other possible deals. But as you rightly say, such deals would be rare. I'd prefer to stay with standard usage, which acknowledges that there's a whole Pareto frontier for people to bargain over.

I think philh is using it in the first way you described, just while honoring the fact that potential future deals factor into how desirable a deal is for each party. We do this implicitly all the time when money is involved: coming away from a deal with more money is desirable only because that money makes the expected outcomes of future deals more desirable. That's intuitive because it's baked into the concept of money, but the same consideration can apply in different ways.

Acknowledging this, we have to consider the strategic advantages that each party has as assets at play in the deal. These are usually left implicit and not obvious. So in the case of re-opening Platform 3, the party in favor of making the platform accessible has a strategic advantage if no deal is made, but loses that advantage if the proposed deal is made. The proposed deal, therefore, is not a Pareto improvement compared to not making a deal.

I think I'm using it in the standard way.

I don't really think of it in terms of deals, but in terms of world states. A world state might or might not be a Pareto improvement over another.

But then I guess I'm equivocating between deals and outcomes of deals . So when I say it wouldn't be a Pareto improvement for Adam to give Beth his card, I mean that the world state "Beth has the card" isn't a Pareto improvement over the world state "Adam has the card".

(I don't mean that Adam wouldn't agree to the deal - that's just not the question I'm pointing at. Though in this toy world, where taking the deal makes him worse off, I'm not sure why he would.)

I think that most takes would say that that is a Pareto improvement, and I think that when I disagree, I'm not just using the term differently.

If you judge the Pareto goodness of the state "Adam has the card" by all its possible futures, then no future can be a strict Pareto improvement, right? That seems like a drawback of using the term in this way.

I'm not sure why you think I'm doing that. I'm judging based on the assets people have and the affordances they grant.

In another thought experiment, we would say that money has no intrinsic value beyond what it can buy people. But if Adam gives all his money to Beth, who uses it to buy something, we probably wouldn't say this is a Pareto improvement on the basis that Adam's only lost something he doesn't intrinsically value.

I've argued before that there is no intrinsic distinction between trade and extortion, apart from the "default" point.

This seems similar. If we take the default point as "Adam has the card", then him giving it to Beth is a pareto improvement if he's indifferent to her happiness, and a strict Pareto improvement if he values her happiness or she gives him some money.

But if we take any given deal as the default point (eg Adam sells Beth the card for $10), then all the other deals are going to be worse for someone, because that deal is already at the Pareto boundary.

The term Pareto improvement needs to specify between which options you're considering. A="The current situation", B="The proposed deal", and C="What some group would 'reasonably' expect to get." It's very plausible that both B and C are Pareto improvements over A, but neither is over the other.