Economic efficiency

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Efficiency in economics is a general term encompassing the idea that a system proceeds with the minimum amount of waste or the maximum output for given inputs and technology. Efficiency is improved if the amount of "waste" or "friction" is reduced. The efficiency of an economy is used to determine how well an economic system serves society.

A system can be called economically efficient if

• No one can be made better off without making someone else worse off.
• The most output is obtained from a given amount of inputs.
• Production proceeds at the lowest possible per unit cost.

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

The term microeconomic reform often refers to policies whose stated goal is to increase economic efficiency.

There are several alternate measures of economic efficiency, these include:

• Pareto efficiency
• Kaldor-Hicks efficiency
• X-efficiency
• Allocative efficiency
• Distributive efficiency
• Productive efficiency
• Optimisation of a social welfare function
• Utility maximization

For applications of these principles see:

• Efficient market hypothesis
• Welfare economics
• Production theory basics
• Microeconomic reform

Documentary films

• OPTIMUM – The Crusade For Efficiency, A Film by Henry Colomer, 2000, 55 minutes. This documentary focuses on three crusaders for efficiency: Jeremy Bentham, Charles Babbage and Francis Galton.

See also

• Distribution (economics)
• Business efficiency
• Compensation principle
• Inefficiency

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Last updated on Monday March 10, 2008 at 13:30:05 PDT (GMT -0700)
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