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Vladimir_Nesov comments on The Second Best - Less Wrong
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"In economics, the ideal, or first best, outcome for an economy is a Pareto-efficient one, meaning one in which no market participant can be made better off without someone else made worse off."
Nitpick - Pareto-efficient outcomes are, in real social systems, horrible, horrible outcomes, very far down the scale in terms of overall utility. They are by nature Utopian, and they fail the way Utopias fail. In a Pareto society, you can't do anything productive, because everything you do makes someone worse-off.
Pareto-efficient outcomes are used in economics only because they are mathematically convenient. It's like looking under a streetlamp for your keys because the light is better there.
A much better form of "optimal" outcome would be one cast in dynamic terms, that instead of saying "No transaction is allowed if there exists Y such that d(utility(Y))/dt < 0", would be to say that "No transaction is allowed such that the sum over all Y of d(u(Y))/dt < 0".
I sense phantom opportunity cost argument. Pareto efficiency is to be found among the available options, not among the unattainable ones.
I must be dense today, but I don't see the "phantom opportunity cost" connection.
Pareto efficiency is more reachable in game theory, where every agent is a party to every transaction; but not in real life, where you are not a party to, nor even aware of, most transactions that affect you. And a good thing, too; otherwise, we would live in a Pareto-optimal dystopia.
Imagine a world where every decision anyone made was subject to veto by anyone else. That would be a Pareto-optimal society.
Upvoted for insight, but this is wrong. Forbidding Pareto-bad transactions isn't enough to bring you to an optimum, you also need to make Pareto-good transactions happen.