Pareto efficiency occurs when:

Pareto efficiency occurs in an economic setting when resources are allocated in such a way that no further improvements can be made to benefit one individual without making another individual worse off. This means that all potential gains from trade or reallocation have been exhausted. The essence of this concept is rooted in the idea of trade-offs and the limits of resource distribution.

When we say that improving one person's situation worsens another's, we are highlighting the critical condition of Pareto efficiency. It indicates that if one individual's welfare improves, this has to happen at the expense of someone else's welfare because resources are limited and reallocating them to benefit one individual means they must be taken away from someone else.

This concept does not concern itself with equal satisfaction or equitable distribution among participants, which means not everyone needs to be equally satisfied for Pareto efficiency to be achieved. Similarly, while resources being allocated without any waste can align with Pareto efficiency, it is not the defining characteristic; the key factor is the inability to make any one individual better off without harming another. Lastly, competition in the market does not directly pertain to the definition of Pareto efficiency, as Pareto efficiency can exist in both competitive and monopolistic markets.