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Economic Efficiency

Definition

Economic efficiency is, roughly speaking, a situation in which nothing can be improved without something else being hurt. Depending on the context, it is usually one of the following two related concepts...

What is 'Economic Efficiency'

Economic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production.

Explaining 'Economic Efficiency'

Some terms that encompass phases of economic efficiency include allocational efficiency, production efficiency and Pareto efficiency. A state of economic efficiency is essentially theoretical; a limit that can be approached but never reached. Instead, economists look at the amount of loss, referred to as waste, between pure efficiency and reality to see how efficiently an economy is functioning.

Economic Efficiency and Scarcity

The principles of economic efficiency are based on the concept that resources are scarce. Therefore, there are not enough resources to have all aspects of an economy functioning at their highest capacity at all times. Instead, the scarce resources must be distributed to meet the needs of the economy in an ideal way while also limiting the amount of waste produced. The ideal state is related to the welfare of the population as a whole with peak efficiency also resulting in the highest level of welfare possible based on the resources available.

Economic Efficiency and Welfare

Measuring economic efficiency is often subjective, relying on assumptions about the social good, or welfare, created and how well that serves consumers. At peak economic efficiency, the welfare of one cannot be improved without subsequently lowering the welfare of another. In this regard, welfare relates to the standard of living and relative comfort experienced by members within the economy.

Factors for Analysis of Economic Efficiency

Basic market forces like the level of prices, employment rates and interest rates can be analyzed to determine the relative improvements made toward economic efficiency from one point in time to another. The amount of waste during the production of goods and services can also be considered if the current allocation of resources is ideal in regards to consumer demand.


Further Reading


Assessing the impact of management buyouts on economic efficiency: Plant-level evidence from the United Kingdom
www.mitpressjournals.org [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

Finance and growth: Schumpeter might be rightFinance and growth: Schumpeter might be right
academic.oup.com [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

The effect of financial liberalization on the efficiency of Turkish commercial banksThe effect of financial liberalization on the efficiency of Turkish commercial banks
www.tandfonline.com [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

Economic efficiency in cooperativesEconomic efficiency in cooperatives
www.journals.uchicago.edu [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

Stock market efficiency and economic efficiency: is there a connection?Stock market efficiency and economic efficiency: is there a connection?
onlinelibrary.wiley.com [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

Turkish banking efficiency and its relation to stock performanceTurkish banking efficiency and its relation to stock performance
www.tandfonline.com [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

Law and economics: measuring the economic efficiency of commercial law in a vacuum of factLaw and economics: measuring the economic efficiency of commercial law in a vacuum of fact
www.jstor.org [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

Mergers, takeovers, and economic efficiency: foresight vs. hindsightMergers, takeovers, and economic efficiency: foresight vs. hindsight
www.sciencedirect.com [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …

Energy efficiency economics and policyEnergy efficiency economics and policy
www.annualreviews.org [PDF]
… funds borrowed against the firm's physical assets or cash flows as collateral to finance the acquisition … The Review of Economics and Statistics, February 2005, 87(1): 148–153 © 2005 by the … ASSESSING THE IMPACT OF MANAGEMENT BUYOUTS ON ECONOMIC EFFICIENCY …



Q&A About Economic Efficiency


What are some examples of resources that are scarce?

Resources such as land, labor, capital, and entrepreneurship are all considered scarce.

What is productive efficiency?

Productive efficiency is when the economy or an economic system operating within the constraints of current production technology could not increase production of one good without sacrificing production of another good.

What happens if an equilibrium isn't productively efficient?

It may result in a distribution of goods where social welfare isn't maximized (bearing in mind that social welfare is a nebulous objective function subject to political controversy).

How do you measure economic efficiency?

Measuring economic efficiency is often subjective, relying on assumptions about the social good created and how well that serves consumers.

When is a society at peak economic efficiency?

A society reaches peak economic efficiency when one person's welfare cannot be improved without subsequently lowering another's welfare.

What does economic efficiency imply?

Economic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency.

How does productive efficiency relate to a PPF?

The concept is illustrated on a PPF where all points on the curve are points of productive efficiency.

Why is measuring economic efficiency subjective?

Measuring economic efficiency relies on assumptions about the social good created and how well that serves consumers.