Editing Neoclassical economics (section)

=== Pareto criterion ===
In a market with a very large number of participants and under appropriate conditions, for each good, there will be a unique price that allows all welfare–improving transactions to take place. This price is determined by the actions of the individuals pursuing their preferences. If these prices are flexible, meaning that all parties are able to pursue transactions at any rates they find mutually beneficial, they will, under appropriate assumptions, tend to settle at price levels that allow for all welfare–improving transactions. Under these assumptions, free-market processes yield an optimum of social welfare. This type of group welfare is called the [[Pareto optimum]] (criterion) after its discoverer Vilfredo Pareto.<ref>CAPORASO, James A., and LEVINE, David P., 1992, Theories of Political Economy. Cambridge: Cambridge University Press. pp. 82–83. ISBN 978-0-521-41561-3</ref>
Wolff and Resnick (2012) describe the [[Pareto optimality]] in another way. According to them, the term "Pareto optimal point" signifies the equality of consumption and production, which indicates that the demand (as a ratio of marginal utilities) and supply (as a ratio of marginal costs) sides of an economy are in balance with each other. The Pareto optimum point also signifies that society has fully realized its potential output.<ref>Wolff, R. D., and Resnick, S. A. (2012) ''[[iarchive:contendingeconom0000wolf/page/101/mode/2up|Contending Economic Theories]]''. The MIT Press. pp. 101. {{ISBN|978-0262517836}}</ref>

[[Normative economics|Normative]] judgments in neoclassical economics are shaped by the [[Pareto criterion]]. As a result, many neoclassical economists favor a relatively [[laissez-faire]] approach to government intervention in markets, since it is very difficult to make a change where no one will be worse off. However, many less conservative neoclassical economists instead use the [[compensation principle]], which says that an intervention is good if the total gains are larger than the total losses, even if losers are not compensated in practice.<ref name=":0" />