Economic efficiency is the use of resources
so as to maximize the production of goods and services. An economic system is said to
be more efficient than another if it can provide more goods and services for society without
using more resources. In absolute terms, a situation can be called economically efficient
if: No one can be made better off without making
someone else worse off. No additional output can be obtained without
increasing the amount of inputs. Production proceeds at the lowest possible
per-unit cost. These definitions of efficiency are not exactly
equivalent, but they are all encompassed by the idea that a system is efficient if nothing
more can be achieved given the resources available. Theory
Old Theory There are two main strains in economic thought
on economic efficiency, which respectively emphasize the distortions created by governments
and the distortions created by markets. These are at times competing, at times complementary
– either debating the overall level of government involvement, or the effects of specific government
involvement. Broadly speaking, this dialog is referred to as Economic liberalism or neoliberalism,
though these terms are also used more narrowly to refer to particular views, especially advocating
laissez faire. Further, there are differences in views on
microeconomic versus macroeconomic efficiency, some advocating a greater role for government
in one sphere or the other. Allocative and productive efficiency
A market can be said to have allocative efficiency if the price of a product that the market
is supplying is equal to the value consumers place on it, represented by marginal cost.
Because productive resources are scarce, the resources must be allocated to various Industries
in just the right amounts, otherwise too much or too little output gets produced. When drawing
diagrams for firms, allocative efficiency is satisfied if the equilibrium is at the
point where marginal cost is equal to average revenue. This is the case for the long run
equilibrium of perfect competition. Productive efficiency is when units of goods
are being supplied at the lowest possible average total cost. When drawing diagrams
for firms, this condition is satisfied if the equilibrium is at the minimum point of
the ATC curve. This is again the case for the long run equilibrium of perfect competition.
Mainstream views The mainstream view is that market economies
are generally believed to be more efficient than other known alternatives and that government
involvement is necessary at the macroeconomic level to counteract the economic cycle – following
Keynesian economics. At the microeconomic level there is debate about how to maximize
efficiency, with some advocating laissez faire, to remove government distortions, while others
advocate regulation, to reduce market failures and imperfections, particularly via internalizing
externalities. It is important to note that most economics analysis is done by trained
economists, who use limited equations and simplistic models to investigate the world
that focus primarily on the financial values attributed to resources. This narrow view
can often fail to incorporate the richness of non-financial values that exist in human
cultures and relationships, as well as the non-financial aspects of nature’s functions.
The first fundamental welfare theorem provides some basis for the belief in efficiency of
market economies, as it states that any perfectly competitive market equilibrium is Pareto efficient.
Strictly speaking, however, this result is only valid in the absence of market imperfections,
which are significant in real markets. Furthermore, Pareto efficiency is a minimal notion of optimality
and does not necessarily result in a socially desirable distribution of resources, as it
makes no statement about equality or the overall well-being of a society.
Schools of thought Advocates of limited government, in the form
laissez faire follow from the 19th century philosophical tradition classical liberalism,
and are particularly associated with the mainstream economic schools of classical economics and
neoclassical economics, and with the heterodox Austrian school.
Advocates of an expanded government role follow instead in alternative streams of progressivism;
in the Anglosphere this is associated with institutional economics and, at the macroeconomic
level, with Keynesian economics. In Germany the guiding philosophy is Ordoliberalism,
in the Freiburg School of economics. Microeconomic
Microeconomic reform are policies that aim to reduce economic distortions via deregulation,
and increase economic efficiency. However, there is no clear theoretical basis for the
belief that removing a market distortion will always increase economic efficiency. The Theory
of the Second Best states that if there is some unavoidable market distortion in one
sector, a move toward greater market perfection in another sector may actually decrease efficiency.
Criteria There are several alternate criteria for economic
efficiency, these include: Pareto efficiency
Kaldor-Hicks efficiency X-inefficiency
Allocative efficiency Distributive efficiency
Dynamic efficiency Optimisation of a social welfare function
Productive efficiency Utility maximization
For applications of these principles see: Efficient-market hypothesis
Microeconomic reform Production theory basics
Welfare economics Competing goals Efficiency is but one of many vying goals
in an economic system, and different notions of efficiency may be complementary or may
be at odds. Most commonly, efficiency is contrasted or paired with morality, particularly liberty
and justice. Some economic policies may be seen as increasing efficiency, but at the
cost to liberty or justice, while others may be argued to both increase efficiency and
be more free or just. There is debate on what effects specific policies have, which goals
should be pursued, the relative weights that should be placed on different goals, and which
trade-offs should be made. For example, some advocates of laissez faire
argue that such economies protect property rights and are thus both free and just, regardless
of whether or not they are more efficient, though advocates also generally believe that
laissez faire economies are more efficient. Others argue that laissez faire leads to concentration
of power and thus curtails liberty and reduces competition, and leads to unjust distribution
of income and wealth, regardless of whether it increases efficiency, for example in the
early 20th century American progressive movement – some argue that laissez faire decreases
efficiency in addition to being unfree and unjust, while others argue that government
involvement may reduce efficiency, but that this is an acceptable cost for the increase
in liberty and justice. In welfare economics, trade-offs between efficiency
and distributive justice, particularly in redistribution – to the extent that a certain
policy decreases efficiency – is often visualized by the metaphor of the leaky bucket, imagining
income or wealth as water moved between individuals, and inefficiency as leakage. Opponents of
redistribution argue that redistribution is not only inefficient, but unjust.
See also Business efficiency
Compensation principle Distribution
Economic equilibrium References 5.Tan Lidong,
publishing house of China university of politics and law
Further reading Heyne, Paul. “Efficiency”. In David R. Henderson.
Concise Encyclopedia of Economics. Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658.
OCLC 237794267. 

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