Summary in haiku form
Pareto efficiency
Is only one part.
Summary in one paragraph
It’s probably impossible for everyone to agree on the definition of a “good outcome”, but economists pay lots of attention to one part of “good”: Pareto efficiency, which occurs when an outcome is so good that it’s not possible to make one person better off without making someone else worse off (in other words, when there are no Pareto improvements over it). Pareto efficient outcomes may not be good—for example, it’s Pareto efficient to cut the cake so that one child gets the whole cake—but Pareto inefficient outcomes are in a meaningful sense bad: if it’s possible to make someone better off without making anyone worse off, why not do it? One way to promote Pareto efficiency is to provide opportunities to trade, e.g., with tradable fishing permits or tradable pollution permits. The Coase theorem says that people have an incentive to trade until they have exhausted all possible gains from trade, and if that happens then we have reached a Pareto efficient outcome!
Notes on specific pages
Links to Pareto
ITQs
Carbon cap-and-trade
