A Pareto improvement is a change from one allocation to another that benefits at least one person without making anyone else worse off. The original allocation is said to be Pareto-dominated by the new one. The existence of a potential Pareto improvement from a given allocation signifies that the current allocation is Pareto inefficient. For example, if an allocation 'N' is inefficient, it means there are other potential outcomes that both parties would prefer, creating an opportunity for successful negotiation. However, it is important to note that a Pareto inefficient allocation (like 'N') might still be preferred by an individual to a different, Pareto efficient allocation (like 'L') if the inefficient allocation provides them with higher personal utility.