Pareto efficiency or Pareto optimality is a situation where no individual or preference criterion can be better off without making at least one individual or preference criterion worse off or without any loss thereof. The following three concepts are closely related:

• Given an initial situation, a Pareto improvement is a new situation where some agents will gain, and no agents will lose.
• A situation is called Pareto dominated if there exists a possible Pareto improvement.
• A situation is called Pareto optimal or Pareto efficient if no change could lead to improved satisfaction for some agent without some other agent losing or if there is no scope for further Pareto improvement.

A limitation with the concept of Pareto efficiency is that it assumes that knowledge about other market participants is available to all participants, in that every player knows the payoffs and strategies available to other players so as to have complete information. Bayesian efficiency is an analog of Pareto efficiency for situations in which there is incomplete information.