Pareto Optimality is an economic theory devised by Italian economist Vilfredo Pareto. In this situation, resources cannot be reallocated without...

Pareto Optimality is an economic theory devised by Italian economist Vilfredo Pareto. In this situation, resources cannot be reallocated without making somebody worse off. Pareto Optimality applies in contract law when one is faced with the choice of breaching a contract with one party in order to enter into another contract with another party that will be more profitable to one's firm. Suppose, for example, that your firm has a contract to provide widgets to Party A for $1.00 a widget. Party B offers you $1.50 a widget, and Party A's cost to cover is $1.20 a widget. Thus, by breaching the contract with A, and paying damages to A, your firm will receive an additional profit of 30 cents per widget.