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Efficiency (economics)
 
 
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Economic efficiency is used to refer to a number of related concepts. It is the using resources in such a way as to maximize the production of goods and services. A system can be called economically efficient if:

These definitions of efficiency are not exactly equivalent. However, they are all encompassed by the idea that nothing more can be achieved given the resources available.

An economic system
Economic system

An economic system or ?conomic system is a system that involves the Economic production, distribution and consumption of Good and Service between the entities in a particular society....
 is more efficient if it can provide more goods and services
Goods and services

In economics, economic output is divided into physical good and intangible Service s. Consumption of goods and services is assumed to produce utility....
 for society
Society

A society is a group of humans characterized by patterns of relationships between individuals that share a distinctive culture and/or institutions....
 without using more resources.






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Economic efficiency is used to refer to a number of related concepts. It is the using resources in such a way as to maximize the production of goods and services. A system can be called economically efficient if:
  • No one can be made better off without making someone else worse off.
  • More output cannot 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. However, they are all encompassed by the idea that nothing more can be achieved given the resources available.

An economic system
Economic system

An economic system or ?conomic system is a system that involves the Economic production, distribution and consumption of Good and Service between the entities in a particular society....
 is more efficient if it can provide more goods and services
Goods and services

In economics, economic output is divided into physical good and intangible Service s. Consumption of goods and services is assumed to produce utility....
 for society
Society

A society is a group of humans characterized by patterns of relationships between individuals that share a distinctive culture and/or institutions....
 without using more resources. Market economies are generally believed to be more efficient than other known alternatives. The first fundamental welfare theorem
Fundamental theorems of welfare economics

There are two fundamental theorems of welfare economics. The first states that any competitive equilibrium or Walrasian equilibrium leads to a Pareto efficiency allocation of resources....
 provides some basis for this belief, as it states that any perfectly competitive market equilibrium is efficient (but only if no market imperfections exist).

Microeconomic reform
Microeconomic reform

The term microeconomic reform refers to policies directed to achieve improvements in economic efficiency, either by removing distortions in individual sectors of the economy or by reforming economy-wide policies such as tax policy and competition policy with an emphasis on economic efficiency ....
 are policies that aim to reduce economic distortions, 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
Theory of the Second Best

The Theory of the Second Best concerns what happens when one or more Pareto efficiency are not satisfied in an economic model. Canadian economist Richard Lipsey and Australian-American economist Kelvin Lancaster showed in a 1956 paper that if one optimality condition in an economic model is not satisfied, it is possible that the next-best sol...
 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.

There are several alternate criteria for economic efficiency, these include:
  • Pareto efficiency
    Pareto efficiency

    Pareto efficiency, or Pareto optimality, is an important concept in economics with broad applications in game theory, engineering and the social sciences....
  • Kaldor-Hicks efficiency
    Kaldor-Hicks efficiency

    Kaldor-Hicks efficiency is a measure of economic efficiency that captures some of the intuitive appeal of Pareto efficiency, but has less stringent criteria and is hence applicable to more circumstances....
  • X-efficiency
    X-efficiency

    In economics, x-efficiency is the effectiveness with which a given set of inputs are used to produce outputs. If a firm is producing the maximum output it can, given the resources it employs, such as men and machinery, and the best technology available, it is said to be x-efficient....
  • Allocative efficiency
    Allocative efficiency

    Allocative efficiency is a situation in which the limited Resource of a firm are allocated in accordance with the wishes of consumers. An allocatively efficient economy produces an "optimal mix" of commodities....
  • Distributive efficiency
    Distributive efficiency

    In welfare economics, distributive efficiency occurs when goods and services are received by those who have the greatest need for them. Abba Lerner first proposed the idea of distributive efficiency in his 1944 book The Economics of Control....
  • Productive efficiency
    Productive efficiency

    Productive efficiency occurs when the economy is operating at its production possibility frontier . This takes place when production of one Good is achieved at the lowest cost possible, given the production of the other good....
  • Optimisation of a social welfare function
    Social welfare function

    In economics a social welfare function can be defined as a Function of a real variable that ranks conceivable social states from lowest on up as to welfare of the society....
  • Utility maximization


For applications of these principles see:
  • Efficient market hypothesis
    Efficient market hypothesis

    In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information....
  • Welfare economics
    Welfare economics

    Welfare economics is a branch of economics that uses microeconomics techniques to simultaneously determine allocative efficiency within an economy and the income Distribution associated with it....
  • Production theory basics
    Production theory basics

    In microeconomics, production is quite simply the conversion of inputs into outputs. It is an economic process that uses resources to create a good or service that is suitable for trade....
  • Microeconomic reform
    Microeconomic reform

    The term microeconomic reform refers to policies directed to achieve improvements in economic efficiency, either by removing distortions in individual sectors of the economy or by reforming economy-wide policies such as tax policy and competition policy with an emphasis on economic efficiency ....


See also

  • Welfare economics
    Welfare economics

    Welfare economics is a branch of economics that uses microeconomics techniques to simultaneously determine allocative efficiency within an economy and the income Distribution associated with it....
  • Distribution (economics)
    Distribution (economics)

    Distribution in economics refers to the way total Output or income is distributed among individuals or among the factors of production . In general theory and the national income and product accounts, each unit of output corresponds to a unit of income....
  • Business efficiency
    Efficiency ratio

    The efficiency ratio, a ratio that is typically applied to banks, in simple terms is defined as expenses as a percentage of revenue , with a few variations....
  • Compensation principle
    Compensation principle

    In welfare economics, the compensation principle refers to a decision rule used to select between pairs of alternative feasible social states. One of these states is the hypothetical point of departure ....
  • Inefficiency
    Inefficiency

    The Term inefficiency has several meanings depending on the context in which its used:*Algorithmic efficiency - refers to less than optimum computer programs that might exhibit one of more of the symptoms of:-...