The function of the retina is crucial, for it must encode visual signals so the brain can detect objects in the visual world. However, the biological mechanisms of the retina add noise to the visual signal and therefore reduce its quality and capacity to inform about the world. Because an organism's survival depends on its ability to unambiguously detect visual stimuli in the presence of noise, its retinal circuits must have evolved to maximize signal quality, suggesting that each retinal circuit has a specific functional role. Here we explain how an ideal observer can measure signal quality to determine the functional roles of retinal circuits. In a visual discrimination task the ideal observer can measure from a neural response the increment threshold, the number of distinguishable response levels, and the neural code, which are fundamental measures of signal quality relevant to behavior. It can compare the signal quality in stimulus and response to determine the optimal stimulus, and can measure the specific loss of signal quality by a neuron's receptive field for non-optimal stimuli. Taking into account noise correlations, the ideal observer can track the signal-to-noise ratio available from one stage to the next, allowing one to determine each stage's role in preserving signal quality. A comparison between the ideal performance of the photon flux absorbed from the stimulus and actual performance of a retinal ganglion cell shows that in daylight a ganglion cell and its presynaptic circuit loses a factor of approximately 10-fold in contrast sensitivity, suggesting specific signal-processing roles for synaptic connections and other neural circuit elements. The ideal observer is a powerful tool for characterizing signal processing in single neurons and arrays along a neural pathway.