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. 
