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joeteicher 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".
Regarding Pareto-efficient outcomes, what do you think would happen if Omega came down and allocated all goods in a pareto-efficient way, and then left? Assume he did this simply via pareto-improving trades, not by messing with distributions or anything. Sure, maybe for a little while there would be very few economic transactions. The only trades that could happen would be ones with negative externalities because otherwise you wouldn't be able to find one that made both parties better off. However, around dinner time people's preferences would start changing such that they would prefer some food to some of their money and all of a sudden there would be a ton of pareto-improving trades available.
My point is that everyone's utlity function is a function of time. Therefore any static allocation of goods would be pareto-efficient for a very short time, and then start to become pareto-inefficient very quickly, unless there was a constant stream of transactions pushing it back out onto the efficient frontier.