Editing Pareto efficiency (section)

== Pareto efficiency and market failure ==
In order to fully understand market failure, one must first comprehend market success, which is defined as the ability of a set of idealized competitive markets to achieve an equilibrium allocation of resources that is Pareto-optimal in terms of resource allocation. According to the definition of market failure, it is a circumstance in which the conclusion of the first fundamental theorem of welfare is erroneous; that is, when the allocations made through markets are not efficient.<ref>Ledyard, J. O. (1989). Market Failure. In: Eatwell, J., Milgate, M., Newman, P. (eds.) Allocation, Information and Markets. The New Palgrave. Palgrave Macmillan, London. {{doi|10.1007/978-1-349-20215-7_19}}.</ref> In a free market, market failure is defined as an inefficient allocation of resources. Due to the fact that it is feasible to improve, market failure implies Pareto inefficiency. For example, excessive consumption of depreciating items (drugs/tobacco) results in external costs to non-smokers, as well as premature death for smokers who do not quit. An increase in the price of cigarettes could motivate people to quit smoking while also raising funds for the treatment of smoking-related ailments.

=== Approximate Pareto efficiency ===
Given some ''ε'' > 0, an outcome is called '''''ε''-Pareto-efficient''' if no other outcome gives all agents at least the same utility, and one agent a utility at least (1&nbsp;+&nbsp;''ε'') higher. This captures the notion that improvements smaller than (1&nbsp;+&nbsp;''ε'') are negligible and should not be considered a breach of efficiency.